How to Account for Stock Options

Written by carter mcbride
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How to Account for Stock Options
Accountants must account for stock options on a company's books. (business accounts image by Nicemonkey from Fotolia.com)

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.

Skill level:
Easy

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Instructions

  1. 1

    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.

  2. 2

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

  3. 3

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

  4. 4

    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.

  5. 5

    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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