The Santiago Corporation provides an executive stock option plan. Under the plan, the company granted options on January 1, 2021, that permit executives to acquire 70 million of the company's $1 par value common shares within the next eight years, but not before December 31, 2024 (the vesting date). The exercise price is the market price of the shares on the date of the grant, $27 per share. The fair value of the options, estimated by an appropriate option pricing model, is $4 per option. No forfeitures are anticipated. Ignore taxes. Required: 1. Determine the total compensation cost pertaining to the options. 2. & 3. Prepare the appropriate journal entries (if any).

TOTAL COMPENSATION EXPENSE

=> 70 MILLION * 4 PER OPTION => 280 MILLION

B

COMPENSATIO EXPENSE ON 31ST DEC 2016

[(70 * 4 ) / 4] * 1 => 70 MILLION

1.EMPLOYEE COMPENSATION EXPENSE A/C DR. $70 MILLION

TO EMPLOYEE STOCK OPTION A/C CR. $ 70 MILLION

[BEING EXPENSES RECOGNISED]

2. PROFIT AND LOSS A/C DR. $70 MILLION

TO EMPLOYEE COMPENSATION EXPENSE A/C CR. $ 70 MILLION

[ BEING EXPENSES TRANSFERRED TO PROFIT AD LOSS A/C]

ANSWER C

1. BANK A/C DR. $1890 MILLION

TO EMPLOYEE STOCK OPTION A./C CR. $ 1890 MILLION

[ BEING AMOUNT RECEIVED ON EXCERSING OF OPTIONS]

2. EMPLOYEE STOCK OPTION A/C DR $ 2170 MILLION

TO EQUITY SHARE CAPITAL A/C CR $ 70 MILLION

TO SECURITY PREMIUM A/C CR. $ 2100 MILLION

[ BEING SHARES ISSUED TO EMPLOYEES]

Check the explanation

Explanation:

Stock options: which can be refereed to as the option to purchase the shares of the company at a preset price especially for the employees while it is made available for a specific few.

In solving the question above, we'll be doing some step by step calculation as seen below.

Total Compensation Expense

=> 70 Million * 4 Per Option => 280 Million

B

Compensation Expense On 31st Dec 2016

[(70 * 4 ) / 4] * 1 => 70 Million

1.Employee Compensation Expense A/C Dr. $70 Million

To Employee Stock Option A/C Cr. $ 70 Million

[Being Expenses Recognized]

2. Profit And Loss A/C Dr. $70 Million

To Employee Compensation Expense A/C Cr. $ 70 Million

[ Being Expenses Transferred To Profit Ad Loss A/C]

Answer C

1. Bank A/C Dr. $1890 Million

To Employee Stock Option A./C Cr. $ 1890 Million

[ Being Amount Received On Excersising Of Options]

2. Employee Stock Option A/C Dr $ 2170 Million

To Equity Share Capital A/C Cr $ 70 Million

To Security Premium A/C Cr. $ 2100 Million

[ Being Shares Issued To Employees]

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