Performance Based Stock Options
Bauil Corporation, a new environmental control company, initiated a performance based stock option plan for its management on January 1, 2007. The plan provided for the granting of a variable number of stock options to management personnel who worked for the entire 4 year period ending December 31, 2010, depending on the net income earned by the company in 2010. No options were granted for the first $50,000 of net income. Thereafter, the following options were available based on the level of net income in 2010.
|
$50,000–$99,999 |
5,000 stock options |
|
$100,000–$124,999 |
10,000 stock options |
|
$125,000–$149,999 |
15,000 stock options |
|
$150,000 or more |
25,000 stock options |
The exercise price for the $5 par common stock was $25 per share. The fair value of the options on the grant date was $7. Assume the market price for the Bauil stock and Bauil’s forecasted 2010 net income were as follows at each of the following dates:
|
|
Stock Price |
Forecasted 2010 Income |
|
January 1, 2007 |
$27 |
$110,000 |
|
December 31, 2007 |
30 |
130,000 |
|
December 31, 2008 |
29 |
160,000 |
|
December 31, 2009 |
35 |
140,000 |
|
December 31, 2010 |
36 |
130,000 (actual) |
Instructions:
Prepare journal entries related to the stock options of Bauil for the period 2007–2010 assuming that all available options are exercised on December 31, 2010.