E 19–5 – American Optical Corporation – Stock options 

American Optical Corporation provides a variety of share-based compensation plans to its employees. Under its executive stock option plan, the company granted options on January 1, 2011, that permit executives to acquire 4 million of the company’s $1 par common shares within the next five years, but not before December 31, 2012 (the vesting date). The exercise price is the market price of the shares on the date of grant, $14 per share. The fair value of the 4 million options, estimated by an appropriate option pricing model, is $3 per option. No forfeitures are anticipated. Ignore taxes.

Required:

1. Determine the total compensation cost pertaining to the options.

2. Prepare the appropriate journal entry to record the award of options on January 1, 2011.

3. Prepare the appropriate journal entry to record compensation expense on December 31, 2011. 

4. Prepare the appropriate journal entry to record compensation expense on December 31, 2012.

Exercise 19-5