Question 12 (10 points)
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Big-Funds Ltd. granted stock options to executives in early 2023. The stock options vest over four years and expire after six years. In total, the options allow the purchase of 40,000 shares at $10 per share. Option pricing models indicate that the options have a total fair value of $600,000. Estimates of retention are 80% at the end of 2023 and 75% at the end of 2024.
Required:
a) Provide the journal entries to be recorded with respect to the options at the end of 2023 and 2024.
b) What would the balance be in the equity account for stock options at the end of the forth year if retention remained at 70%?
c) Assume that actual retention was 70%, and the options were exercised at the end of the fourth year when the market price of common shares is $25. Provide the entry for exercise.
d) Assume that retention was 70% but the options were allowed to lapse after six years when the price of common shares is $4. Provide the entry for the lapse.
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