Accounting for a Basic Stock Based Compensation Plan
On January 1, the company granted 100,000 stock options to key employees. Each option allows an employee to buy one share of $1 par common stock for $30, which was the market price of the shares on the grant date of January 1. In order to be able to exercise the options, the employees must remain with the company for three entire years. It is estimated that the fair value of each option on the date of grant was $3. At the end of three years, all of the options were exercised when the market price of the shares was $42 per share. Make all of the journal entries necessary with respect to these options in the first year. Also make the journal entry that would be made at the end of three years to record the exercise of the options.