(Issuance, Exercise, and Termination of Stock Options) On January 1, 2006, 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, 2008, 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 fair value option-pricing model determines total compensation to be $400,000.
On May 1, 2008, 8,000 options were exercised when the market price of Nichols’ stock was $30 per share. The remaining options lapsed in 2010 because executives decided not to exercise their options.
Hint: (LO 4)
Instructions
Prepare the necessary journal entries related to the stock option plan for the years 2006 through 2010.
1/1/06 No entry
12/31/06 Compensation Expense…………………………………………….. 200,000
Paid-in Capital—Stock Options……………………….. 200,000
($400,000 X 1/2)
12/31/07 Compensation Expense…………………………………………….. 200,000
Paid-in Capital—Stock Options……………………….. 200,000
5/1/08 Cash (8,000 X $20)…………………………………………………… 160,000
Paid-in Capital—Stock Options………………………………… 320,000 *
Common Stock (8,000 X $5)…………………………….. 40,000
Paid-in Capital in Excess of Par………………………. 440,000
*($400,000 X 8,000/10,000)
1/1/10 Paid-in Capital—Stock Options………………………………… 80,000
Paid-in Capital from Expired Stock
Options ($400,000 – $320,000) 80,000
