(Issuance, Exercise, and Termination of Stock Options) On January 1, 2016, Nichols Corporation granted 10,000 options to key executives. Each option allows the executive to purchase one share of Nichols’ \(5 par value common stock at a price of \)20 per share. The options were exercisable within a 2-year period beginning January 1, 2018, if the grantee is still employed by the company at the time of the exercise. On the grant date, Nichols’ stock was trading at \(25 per share, and a fairvalue option-pricing model determines total compensation to be \)400,000.On May 1, 2018, 8,000 options were exercised when the market price of Nichols’ stock was $30 per share. The remaining options lapsed in 2020 because executives decided not to exercise their options.

Instructions

Prepare the necessary journal entries related to the stock option plan for the years 2016 through 2020.

Step by step solution

01

Explanation on Stock Options

Stock options permits the buyer or investor to buy or sell the security at the price which is given in the contract, and in given period.

02

Journal entry

Date	Transactions	Debit	Credit
January 1, 2016	No entry
December 31, 2016	Compensation Expense	$200,000
	Paid-in Capital—Stock Options		$200,000
	($400,000 x ½)
December 31, 2017	Compensation Expense	200,000
	Paid-in Capital—Stock Options		200,000
May 1, 2018	Cash (8,000 X $20)	160,000
	Paid-in Capital—Stock Options ($400,000 x 8000 /10000)	320,000
	Common Stock (8,000 X $5)		40,000
	Paid-in Capital in Excess of Par—Common Stock		440,000
January 1, 2020	Paid-in Capital—Stock Options	80,000
	Paid-in Capital—Expired Stock Options ($400,000 – $320,000)		80,000

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