How to Do Accounting Entries for Stock Options
Stock options allow a person to purchase stock at a set price on a date in the future. Stock options from a company are most likely given to employees as a form of compensation. The accounting methods will change depending on whether or not the options are for compensation. It is important a company properly accounts for their stock options to comply with generally accepted accounting principles.
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Instructions
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1
Calculate how much of the stock option's worth applies on a yearly basis. For example, a company distributes $100,000 of stock options for the next two years of employee work. Since the option compensates for two years, the company must recognize a $50,000 expense each year.
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2
Debit "Compensation Expense" and credit "Additional Paid in Capital (APIC) for Stock Options." Each year the stock options compensate employees, this journal entry is required.
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3
Debit "Cash" by the amount of cash collected, "APIC for Stock Options" for the total amount placed in "APIC for Stock Options" in Step 2, when stock options are exercised. Credit "Common Stock" by the amount of stock exercised in the stock option and "APIC - Excess of Par" to balance the journal entries. In the example, if the company collects $150,000 of cash, debit "Cash" $150,000" and "APIC for Stock Options" by $100,000. Then if the stock options were for 1,000 shares of $100 par stock, credit "Common Stock $100,000" and "APIC - Excess of Par" for $150,000.
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4
Debit "APIC for Stock Options" and credit "APIC for Expired Stock Options" by the amount of total "APIC for Stock Options" collected in the compensation period when the stock options expire.
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References
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