How to Expense Employee Stock Options

Companies need to account for stock options.

Sometimes for compensation, an employer will provide an employee with stock options. Stock options are an option to buy stock in the corporation at a future date for a set price. If the set price is less than the market value of the stock, then the employee will exercise his stock options. If the set price is more than the market value of the stock, then the employee will let his stock options expire. As an example, a company offers stock options due in three years. The stock options are for working the next three years. The stock options have a total value of $150,000. The stock option is for 50,000 shares of stock at a purchase price of $10. The stocks par value is $1.

Instructions

1. Debit "Compensation Expense" and credit "Additional Paid-In Capital for Stock Options" to record granting the stock options. The expense should be matched to the work completed. In our example, debit "Compensation Expense" $50,000 and credit "Additional Paid-In Capital for Stock Options" $50,000. Repeat this entry for each year. The amount is $50,000 instead of $150,000 because the stock options are for three years of compensation, so $150,000 divided by 3 years equals $50,000 per year.

2. Record the journal entry for exercising the stock option, if they are exercised. Debit "Cash Received" and "Additional Paid-In Capital for Stock Options." "Cash Received" equals the amount of cash received for the stock, $500,000 in the example and "Additional Paid-In Capital for Stock Options" equals the amount first recorded, $150,000 in the example. Credit "Common Stock" by the par value times the number of stock issued, $50,000 in the example, and "Additional Paid-in Capital in Excess of Par" by the amount needed to balance the journal entry, $600,000 in the example.

3. Record the journal entry to record the expiration of the options if they expire. Debit "Additional Paid-In Capital for Stock Options," $50,000 in the example, and credit "Additional Paid-In Capital for Expired Stock Options," $50,000.

References

• FASB: Summary of Statement No. 123
• Maryville: Accounting for Stock Compensation