P19-6
Walters Audio Visual, Inc., offers a stock option plan to its regional
managers. On January 1, 2011,
P 19-6
Stock option plan; deferred tax effect recognized – EXCEL TEMPLATE
19-6 Walters
Audio Visual, Inc., offers a stock option plan to its regional managers. On
January 1, 2011, options were granted for 40 million $1 par common shares. The
exercise price is the market price on the grant date, $8 per share. Options
cannot be exercised prior to January 1, 2013, and expire December 31, 2017. The
fair value of the options, estimated by an appropriate option pricing model, is
$2 per option. Because the plan does not qualify as an incentive plan, Walters
will receive a tax deduction upon exercise of the options equal to the excess
of the market price at exercise over the exercise price. The income tax rate is
40%.
Required:
1.Determine
the total compensation cost pertaining to the stock option plan.
2.
Prepare the appropriate journal entries to record compensation expense and its
tax effect on December 31, 2011.
3.
Prepare the appropriate journal entries to record compensation expense and its
tax effect on December 31, 2012.
4.
Record the exercise of the options and their tax effect if all of the
options are exercised on March 20, 2016, when the market price is $12 per
share.
5. Assume
the option plan qualifies as an incentive plan. Prepare the appropriate journal
entries to record compensation expense and its tax effect on December 31, 2011.
6.
Assuming the option plan qualifies as an incentive plan, record the exercise of
the options and their tax effect if all of the options are exercised on
March 20, 2016, when the market price is $11 per share.
WALTERS AUDIO VISUAL, INC.
$1 par common share options granted
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40,000,000
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shares
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Exercise price
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$ 8.00
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per share
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Fair value
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$ 2.00
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per option
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Income tax rate
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40%
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Please
download EXCEL TEMPLATE for solution
File name: P19-6-Walters-Audio.xls File type: application/vnd.ms-excel PRICE: $7
