On November 1, 2018, London Corp. adopted a stock option plan allowing certain of their executives to purchase a total o

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On November 1, 2018, London Corp. adopted a stock option plan
allowing certain of their executives to purchase a total of 30,000
common shares. The options were granted on January 2, 2019, and
were exercisable four years after the grant date (Jan 2, 2023), as
long as the executives were still employees. The options expire
eight years from the grant date. The exercise price was set at $ 46
and, using an option pricing model to value the options, the total
compensation expense was estimated to be $ 510,000. At January 2,
2019, the market price of the shares was $ 50.
On January 1, 2020, 3,000 options were terminated (forfeited)
when an employee left the company. The market value of the shares
at that date was $ 32. All the remaining options were exercised
during 2023: 17,000 on January 3 when the market price was $ 62,
and 10,000 on May 1 when the market price was $ 77.
Instructions
a) Calculate
the intrinsic value and the time value of the stock option.
b) Prepare
journal entries relating to the stock option plan for the years
2019 through 2023. Assume that the employees perform services
equally from 2019 through 2022. Year end is December 31.
c) Discuss the
advantages and disadvantages of offering stock options to employees
as a means of compensation.