ACC 808

Spring 2021

Mini Case #1

Read the following primers

1. What Are Employee Stock Options?
2. Basic Principles in the New Accounting for Stock Options A Roadmap for Navigating
SFAS 123(R)

Answer the questions below:

On Jan 1, 2018, McCarthy Corporation granted nontransferable options to certain key

employees. The options permit the purchase of 10,000 shares of McCarthy’s common stock at
a price of $40 per share. On Jan 1, 2018, the stock’s market value was $40 per share and
McCarthy estimates that each option has a fair value of $7. The options were fully vested and
exercisable beginning January 1, 2020 (i.e., a two-year vesting period) and they expire on
December 31, 2023. On Jan 1, 2018, McCarthy estimates that 75% of the options will vest.
Ignore income taxes.

On Dec 31, 2019, 80% of the employees completed the service requirement and become fully
vested. The fair value of the options on Dec 31, 2019 is $9. On January 1, 2020, 8,000 of the
options were exercised when the price was $48 per share.

1. What is the intrinsic value of each option on Jan 1, 2018?

0 (allow to buy at $40 when it is trading at $40)

2. What is the fair value of each option on Jan 1, 2018?

$7

3. What journal entries would McCarthy make in 2018, 2019, and 2020 to record the stock
option activity?

2018 10,000*75%*7*1/2=26,250
Compensation expense 26,250
APIC-stock options 26,250

2019 10,000*80%*9-26,250=45,750
Compensation expense 45,750
APIC-stock options 45,750
 ACC 808
Spring 2021
2020 8,000*40=320,000
Cash 320,000
APIC-stock options 72,000
Common Stock 392,000