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Question
McQueen, Inc. grants 200,000 nonqualified stock options to Robert Chalmers, the CEO, on January 1, 2011. The par value of McQueen's common stock is $1. The exercise price on the options is $35 per share, and the options are exercisable in two years. The stock price on January 1, 2011 is $31 per share. This is a fixed option plan. Using the Black-Scholes option pricing model, the value of each option is estimated to be $15.50 at the date of grant. Stock prices are $45, $65, and $50 at December 31, 2011, 2012, and 2013, respectively. Robert exercises his options on April 14, 2014, when the stock price is $57 per share.
Required:
1. How much expense would have been recognized for the year ended December 31, 2011 assuming current standards allowed McQueen to use the intrinsic value method (as per APB Opinion No. 25) to measure compensation expense for the options?
2. Using current GAAP, how much expense will McQueen, Inc. recognize for the year ended December 31, 2012 related to the options?
3. Continuing with the assumptions in part #2, prepare the journal entries needed on the date of exercise.
4. Continuing with the assumptions made in part #2, explain how the tax benefits will affect McQueen's financial statements in the year of exercise. Give specific amounts and accounts assuming a 35% income tax rate.
Answer
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