E 19–5 - American Optical Corporation - Stock options ● LO2
American Optical Corporation provides a variety of share-based
compensation plans to its employees. Under its executive stock option
plan, the company granted options on January 1, 2011, that permit
executives to acquire 4 million of the company’s $1 par common shares
within the next five years, but not before December 31, 2012 (the
vesting date). The exercise price is the market price of the shares on
the date of grant, $14 per share. The fair value of the 4 million
options, estimated by an appropriate option pricing model, is $3 per
option. No forfeitures are anticipated. Ignore taxes.
Required:
1. Determine the total compensation cost pertaining to the options.
2. Prepare the appropriate journal entry to record the award of options on January 1, 2011.
3. Prepare the appropriate journal entry to record compensation expense on December 31, 2011.
4. Prepare the appropriate journal entry to record compensation expense on December 31, 2012.