Assume that Amazon. com has a stock-option plan for top management. Each stock option represents the right to purchase a share of Amazon $1 par value common stock in the future at a price equal to the fair value of the stock at the date of the grant. Amazon has 5,600 stock options outstanding, which were granted at the beginning of 2017. The following data relate to the option grant. Exercise price for options $38
Market price at grant date (January 1, 2017) $38
Fair value of options at grant date (January 1, 2017) $6
Service period 5 years
A. Prepare the journal entries for the first year of the stock-option plan. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)
B. Prepare the journal entries for the first year of the plan assuming that, rather than options, 700 shares of restricted stock were granted at the beginning of 2017
C. Now assume that the market price of Amazon stock on the grant date was $46 per share. Prepare the journal entries for the first year of the plan assuming that, rather than options, 700 shares of restricted stock were granted at the beginning of 2017.

See the journal entries and explanations below:

Explanation:

A. Prepare the journal entries for the first year of the stock-option plan.

We first calculate the Compensation Expense as follows:

Compensation Expense = (Number stock options outstanding * Fair value of options at grant date) / Service period = (5,600 * $6) / 5 = $6,720.

Note: There is no journal entry for January 1, 2017.

The journal entry for December 31, 2017 is as follows:

Date                  Details                                   Dr ($)           Cr ($)          

31 Dec. 2017    Compensation Expense        6,720

                         Paid-in Capital - Stock Options                6,720

                         To record compensation expenses for 2017.              

B. Prepare the journal entries for the first year of the plan assuming that, rather than options, 700 shares of restricted stock were granted at the beginning of 2017.

We first calculate the following:

Unearned Compensation at January 1, 2017 = Number of option * Exercise price = 700 * $38 = $26,600

Common stock at January 1, 2017 = Stock par value * Number of option = $1 * 700 = $700

Compensation Expense at December 31, 2017 = January 1, 2017 Unearned Compensation / Service period = $26,600 / 5 = $5,320

The journal entries will be as follows:

Date               Details                                     Dr ($)              Cr ($)        

31 Jan. '17    Unearned Compensation       26,600

                    Common stock                                                   700

                    Paid-in Capital in excess of par                   25,900

                   To record unearned compensation on January 2017.    

01 Dec. '17   Compensation Expense            5,320

                    Unearned Compensation                                5,320

                   To record compensation expenses for 2017.                  

C. Now assume that the market price of Amazon stock on the grant date was $46 per share. Prepare the journal entries for the first year of the plan assuming that, rather than options, 700 shares of restricted stock were granted at the beginning of 2017.

We first calculate the following:

Unearned Compensation at January 1, 2017 = Number of option * Exercise price = 700 * $46 = $32,200

Common stock at January 1, 2017 = Stock par value * Number of option = $1 * 700 = $700

Compensation Expense at December 31, 2017 = January 1, 2017 Unearned Compensation / Service period = $32,200 / 5 = $6,440

The journal entries will be as follows:

Date               Details                                     Dr ($)              Cr ($)        

31 Jan. '17    Unearned Compensation       32,200

                    Common stock                                                   700

                    Paid-in Capital in excess of par                    31,500

                   To record unearned compensation on January 2017.    

01 Dec. '17   Compensation Expense            6,440

                    Unearned Compensation                                6,440

                   To record compensation expenses for 2017.                  

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