Answer to Question #215730 in Accounting for Milan

Question

On January 2, Year 1, Kunkel Co. granted Muriel, its president, compensatory stock options buy 1000 shares of Kunkel’s $10 par common stock. The options call for a price of $25 per share and are exercisable for 3 years following the grant date. Muriel exercised the options on December 31, Year 1. The market price of the stock was $43 on January 2 Year 1 and $69 on December 31, Year 1. Using an acceptable options pricing model. It was determined that the fair value of the options granted $18,000. By what net amount should stockholder's equity increase as a result of the grant and exercise of the options?

• $25,000

• Debit Cash $25,000
• Debit APIC - Stock Options $18,000
• Credit Common $10,000
• Credit APIC - CS = $33,000

The answer is $25,000. The solution of this question was the journal entry. Can you explain why the answer is $25,000? Thank you.

Answer 1

It is because the call option price is $25 per share and the total shares are 1000 which when multiplied you get $25,000. This will be the net amount that will be recorded in the books. Any amount above that will the revaluation gain while if the fair value goes low as $18,000 the difference will be recorded as revaluation loss in the books. Hence, $25,000 will be recorded as a net figure as $25 was the exercisable call option price.