Walters Audio Visual Inc. offers an incentive stock option plan to its regional managers. On January 1, 2021, options were granted for 68 million $1 par common shares. The exercise price is the market price on the grant date—$7 per share. Options cannot be exercised prior to January 1, 2023, and expire December 31, 2027. The fair value of the 68 million options, estimated by an appropriate option pricing model, is $1 per option.
Required:
1. Determine the total compensation cost pertaining to the incentive stock option plan.
2. Prepare the appropriate journal entry to record compensation expense on December 31, 2021.
3. Prepare the appropriate journal entry to record compensation expense on December 31, 2022.
4. Prepare the appropriate journal entry to record the exercise of 75% of the options on March 12, 2023, when the market price is $9 per share.
5. Prepare the appropriate journal entry on December 31, 2027, when the remaining options that have vested expire without being exercised.

1.$68million fair value of compensation

2.Dr Compensation expense $34 million

Cr Paid-in capital – stock options $34 million

3.Dr Cash $357 million

Dr Paid-in capital – stock options $51 million

Cr Common stock $51 million

Cr Paid-in capital – excess of par (remainder) $357 million

4.Dr Paid-in capital – stock options (17

Cr Paid-in capital – expiration of stock options 17

Explanation:

Walters Audio Visual Inc

1. Total compensation cost pertaining to the options.

At January 1, 2021, the total compensation cost is:

$1 estimated fair value per option x 68 million options granted = $68million fair value of compensation

2. Journal entry to record compensation expense on December 31, 2021

Dr Compensation expense ($68million ÷ 2 years) $34 million

Cr Paid-in capital – stock options $34 million

3. Journal entry to record the exercise of 75% of the options on March 12, 2023 when the market price is $9 per share.

Dr Cash ($7 exercise price x 68million shares×75%) $357 million

Dr Paid-in capital – stock options (75%× 68 million)$51 million

Cr Common stock (51 million shares at $1 par per share) $51 million

Cr Paid-in capital – excess of par(remainder) $357 million

4. Journal entry on December 31, 2027

Dr Paid-in capital – stock options ($68 – 51 million) 17

Cr Paid-in capital – expiration of stock options 17

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