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E 16-11 - stock options exercise of the stock options and...

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E16-11 (Issuance, Exercise, and Termination of Stock Options) On January 1, 2010, Magilla Inc. granted stock options to officers and key employees for the purchase of 20,000 shares of the company’s$10 par common stock at $25 per share. The options were exercisable within a 5-year period beginning January 1, 2012, by grantees still in the employ of the company, and expiring December 31, 2016. The service period for this award is 2 years. Assume that the fair value option-pricing model determines total compensation expense to be $400,000. On April 1, 2011, 3,000 options were terminated when the employees resigned from the company. The market value of the common stock was $35 per share on this date. On March 31, 2012, 12,000 options were exercised when the market value of the common stock was $40 per share. Instructions (a) Prepare journal entries to record issuance of the stock options, termination of the
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Unformatted text preview: stock options, exercise of the stock options, and charges to compensation expense, for the years ended December 31, 2010, 2011, and 2012. (b) Prepare the 12/31/16 entry assuming the remaining options were not exercised. Why would options not be exercised? Solution: 1/1/10 No entry required (Total compensation cost is $400,000) 12/31/10 Compensation expense-----------200,000 Paid-in-capital-Stock options-------200,000 ($400,000*1/2) 4/1/11 Paid-in-capital-Stock options----300,000 Compensation expense-------------300,000 ($200,000*3000/20,000) 12/31/11 Compensation expense-----------170,000 Paid-in-capital-Stock options-------170,000 ($400,000*1/2*17/20) 3/31/12 Cash (12,000*25) --------------------300,000 Paid-in-capital-Stock options-------240,000 ($400,000*12000/20,000) Common stock----------------------------120,000 Paid in capital excess of par------------420,000...
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