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How to Account for Stock Options

Updated March 23, 2017

Stock options allow a holder to buy a set amount of stock at a set price on a set date. For example, a person with stock options in Firm A can buy 100 shares of stock in Firm A at £9 a share on June 1. On June 1, if the stock is worth more than £9 a share, the holder will likely exercise his options and if the stock is worth less than £9, the holder will likely let his options expire. Companies must account for stock options used to compensate employees.

Determine the amount of compensation expense on a per year basis. For example, a company gives £390,000 worth of stock options due in three years. The company must recognise £130,000 in stock options each year.

Determine the information on the stock options. For example, stock options can exercise 600,000 shares of 60p par stock.

Debit "Compensation Expense from Stock Options" and credit "Additional Paid in Capital - Stock Options" each year by the amount determined in Step 1.

Debit "Cash" by the how much cash the company receives for the stock option. Debit "Additional Paid In Capital - Stock Options" by the total amount put into the account from Step 3. Credit "Common Stock" by the amount of stock exercised. Credit "Additional Paid in Capital - Excess of Common Stock Par" to balance the journal entry. In the example, if £520,000 is paid for the stock, then debit "Cash" £520,000, debit "Additional Paid In Capital - Stock Options" £390,000. Credit "Common Stock" by £390,000 and credit "Additional Paid in Capital - Excess of Common Stock Par" by £520,000.

Debit "Additional Paid in Capital - Stock Options" and credit "Additional Paid in Capital - Expired Stock Options" by the total amount in the "Additional Paid in Capital - Stock Options" if the stock options expire.

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About the Author

Carter McBride started writing in 2007 with CMBA's IP section. He has written for Bureau of National Affairs, Inc and various websites. He received a CALI Award for The Actual Impact of MasterCard's Initial Public Offering in 2008. McBride is an attorney with a Juris Doctor from Case Western Reserve University and a Master of Science in accounting from the University of Connecticut.