Stock options give employees the right to buy their employer’s stock at a fixed price, called the exercise price, which gives them an incentive to help the company succeed. When your employees exercise their stock options, you must account for the cash you receive from them and shares of stock you issue to them in your records. A stock price that is higher than the options’ exercise price creates a profit for employees, but has no effect on your accounting records at the time of the exercise.
1. Determine from your accounting records the total number of options your company has issued to employees, the exercise price per option and the number of options employees have exercised. For example, assume your company has issued 10,000 stock options with a $10 exercise price and that employees have exercised 5,000 options.
2. Determine from your records the balance of the “paid-in capital -- stock options” account and the par value per share of common stock, which is the legal capital per share. In this example, assume your “paid-in capital -- stock options” account has a $20,000 balance and that common stock has a $1 par value per share.
3. Multiply the number of options exercised by the exercise price per option. Debit the cash account in a journal entry in your accounting records by this amount. This increases the cash account by the amount of money you received for the options. In this example, multiply 5,000 by $10 to get $50,000. Debit the cash account by $50,000.
4. Divide the number of options exercised by the number of options issued. Multiply the “paid-in capital -- stock options” account balance by your result. Debit this account in the same journal entry by this amount to decrease the account by the proportion of options exercised. In this example, divide 5,000 by 10,000 to get 0.5. Multiply 0.5 by $20,000 to get $10,000. Debit the “paid-in capital -- stock options” account by $10,000.
5. Multiply the number of options exercised by the par value per share of common stock. Credit the common stock account in the same journal entry by this amount. This increases the common stock account by the total par value of shares issued. In this example, multiply 5,000 by $1 to get $5,000. Credit the common stock account by $5,000.
6. Add together the amounts by which you debited the cash account and the “paid-in capital -- stock options” account. Subtract the amount by which you credited the common stock account from your result. Then credit the “paid-in capital in excess of par” account in the same journal entry by this amount. Continuing the example, add $50,000 and $10,000 to get $60,000. Subtract $5,000 from $60,000 to get $55,000. Credit the “paid-in capital in excess of par” account by $55,000.
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