This problem consists of two parts. Part A. On January 1, Year 1, Stone Company issued 100 stock options with an exercise price of $38 each to 10 employees (1,000 options in total). The employees can choose to settle the
Part A. On January 1, Year 1, Stone Company issued 100 stock options with an exercise price of $38 each to 10 employees (1,000 options in total). The employees can choose to settle the options either (a) in shares of stock ($1 par value) or (b) in cash equal to the intrinsic value of the options on the vesting date. The options vest on December 31, Year 3, after the employees have completed three years of service. Stone Company expects that only seven employees will remain with the company for three years and vest in the options. Two employees resign in Year 1, and the company continues to assume an overall forfeiture rate of 30 percent at December 31, Year 1. In Year 2, one more employee resigns. As expected, seven employees vest on December 31, Year 3, and exercise their stock options.
The following represents the share price and fair value at the relevant dates:
Determine the fair value of the stock options at the grant date and the amount to be recognized as compensation expense in Year 1, Year 2, and Year 3. Prepare journal entries assuming that the vested employees choose (a) the cash alternative and (b) the stock alternative.
Part B. Now assume that if the employees choose to settle the stock options in shares of stock, the employees receive a 10 percent discount on the exercise price (i.e., the exercise price would be $34.20). As a result, the fair value of the share alternative on the grant date is $8.80.
Determine the fair value of the stock options at the grant date and the amount to be recognized as compensation expense in Year 1.
Benefit Fund Campolino Company General Ledger General Ledger Defined benefit cosDefined recognized benefit cost in net recognized in Defined benefit asset OCI Cash (liability) | PVDBO | FVPA S(230,000) S(650,000) $420,000 income Balance at January Service cost Interest expense Interest income Net interest Excess of actualretum on plan assets over interest ncome Past service costs Actuarialloss Contributions Benefits paid Balance af December l $456,000 Fair Value of Fair Value of Share Cash Stock Date January 1, Year S43 December 31, Year 1, Year 2 December 31, Year 3 Price Alternative Alternative $6.00 S8.00 $9.00 $6.00 $8.00 $9.00 $45 S47
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- Tutor Answer
Part A According to IFRS 2 35 because Stone has granted employees stock options that can be settled either in cash or in shares of stock this is a compound financial instrument Because this is a trans…View the full answer
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