On October 15, 2017, the board of directors of Ensor Materials Corporation approved a stock option plan for key executives. On January 1, 2018, 29 million stock options were granted, exercisable for 29 million shares of Ensor's $1 par common stock. The options are exercisable between January 1, 2021, and December 31, 2023, at 90% of the quoted market price on January 1, 2018, which was $20. The fair value of the 29 million options, estimated by an appropriate option pricing model, is $6 per option. Ensor chooses the option to recognize forfeitures only when they occur.
Ten percent (2.9 million) of the options were forfeited when an executive resigned in 2019. All other options were exercised on July 12, 2022, when the stock's price jumped unexpectedly to $28 per share.
Required:
1. When is Ensor's stock option measurement date?
2. Determine the compensation expense for the stock option plan in 2018. (Ignore taxes.)
3. & 5. Prepare the necessary journal entries.

Answer and Explanation:

1. The measurement date should always be  the date of grant i.e. January 1, 2018

2. For computing the compensation expense first we have to find out the fair value of award which is shown below:

= estimated fair value per option  × number of options granted

= $6 ×  29 million    

= $174 million    

So, The total compensation is to be allocated is

= $174 million ÷ 3 years

= $58 million per year

3. The journal entries are shown below:

                                                  ($ in millions)

On 2019

Compensation expense ([$174 × 90% × 2 ÷ 3] – $58)        $46.4

   Paid-in capital - stock options         $46.4

(Being the compensation expense is recorded)

On 2020

Compensation expense ([$174 × 90% × 3 ÷3] – $58 – $46.4)      $52.2

       To Paid-in capital–stock options              $52.2

(Being the compensation expense is recorded)

On 2022

Cash ($20 × 90% = $18 exercise price × 26.1 million shares)            $469.8

Paid-in capital - stock options ($20 × 90% = $18 exercise price × $6 per option)       $156.6

         To   Common stock   (26.1 million shares × $1)         $26.1

         To  Paid-in capital – excess of par (balancing figure)                     $600.3

The market price at exercise is not relevant. Hence, ignored it

The 26.1 million is come from

= 29 million options - 2.9 million options

= 26.1 million options

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