EXCEL (Stock-Option Plan) Berg Company adopted a stock-option plan on November 30, 2016, that provided that 70,000 shares of \(5 par value stock be designated as available for the granting of options to officers of the corporation at a price of \)9 a share. The market price was \(12 a share on November 30, 2017.

On January 2, 2017, options to purchase 28,000 shares were granted to president Tom Winter—15,000 for services to be rendered in 2017 and 13,000 for services to be rendered in 2018. Also on that date, options to purchase 14,000 shares were granted to vice president Michelle Bennett—7,000 for services to be rendered in 2017 and 7,000 for services to be rendered in 2018. The market price of the stock was \)14 a share on January 2, 2017. The options were exercisable for a period of one year following the year in which the services were rendered. The fair value of the options on the grant date was \(4 per option.

In 2018, neither the president nor the vice president exercised their options because the market price of the stock was below the exercise price. The market price of the stock was \)8 a share on December 31, 2018, when the options for 2017 services lapsed.

On December 31, 2019, both president Winter and vice president Bennett exercised their options for 13,000 and 7,000 shares, respectively, when the market price was $16 a share.

Instructions

Prepare the necessary journal entries in 2016 when the stock-option plan was adopted, in 2017 when options were granted, in 2018 when options lapsed, and in 2019 when options were exercised.

Step by step solution

01

Definition of Stock Options

A right provided to the trader for buying or selling the shares of the specified stock at an agreed price and date is known as a stock option. Such an option does not generate any obligation for the trader.

02

Journal entries

Date	Accounts and Explanation	Debit ($)	Credit ($)
2016	No journal entry would be made at the time of adoption of the stock option.
2017
2 Jan	No journal entry
31 Dec	Compensation expenses $\left(\left[15,000+7,000\right]\times \$4\right)$	88,000
	Paid-in-capital – stock option		88,000
2018
31 Dec	Compensation expenses role="math" localid="1658930735132" $(\left[13,000+7,000\right]\times \$4)$	80,000
	Paid-in-capital – stock option		80,000
31 Dec	Paid-in-capital – stock option $\left(\left[15,000+7,000\right]\times \$4\right)$	88,000
	Paid-in-capital – expired stock option		88,000
2019
31 Dec	Cash $\left(20,000\times \$9\right)$	180,000
	Paid-in-capital stock option$\left(20,000\times \$4\right)$	80,000
	Common stock data-custom-editor="chemistry" $\left(20,000\times \$5\right)$		100,000
	Paid-in-capital in excess of par common stock		160,000
		$516,000	$516,000

Unlock Step-by-Step Solutions & Ace Your Exams!

• Full Textbook Solutions

  Get detailed explanations and key concepts

• Unlimited Al creation

  Al flashcards, explanations, exams and more...

• Ads-free access

  To over 500 millions flashcards

• Money-back guarantee

  We refund you if you fail your exam.

Start your free trial

Over 30 million students worldwide already upgrade their learning with Vaia!