16-10

Question 1

What you need to know about COMPENSATION EXPENSE

Answer 1

• you record the expense because the work was done (it was part of their pay plan in a way)
• record it at the end of the year for the amount of that year (in case it goes on for more than one year) - not when it was estimated

Question 2

Prepare the necessary journal entries in 2014 when the stock option plan was adopted, in 2015 when the options were granted.

Answer 2

Adopted - make a detailed memo entry

Granted:

On Dec 31 each year make an proration entry for the appropiate amount of the expense:

dr. Compensation Expense
cr. Contributed Surplus - Stock Options

(if there are more people, make the correct calculation per year, not by person)

Question 3

Journal entry when the options are exercised

Answer 3

1. dr Cash (for the total value of the c/s sold within the terms of the option)
   dr. Contrinuted Surplus - Stock options (for the prorated amount of what is actually exercised)
   cr. COMMON SHARES - plug amount (to cover both debits)