(Stock-Based Compensation) Assume that Amazon has a stock-option
plan for top management. Each stock option represents the right to
purchase a share of Amazon $1 par value common stock in the future
at a price equal to the fair value of the stock at the date of the
grant. Amazon has 5,000 stock options outstanding, which were
granted at the beginning of 2010. The following data relate to the
option grant.
Exercise price for options $40
Market price at grant date (January 1, 2010) $40
Fair value of options at grant date (January 1, 2010) $6
Service period 5 years
(a) Prepare the journal entry(ies) for the first year of the
stock-option plan.
(b) Prepare the journal entry(ies) for the first year of the
plan assuming that, rather than options,
700 shares of restricted stock were granted at the beginning
of 2010.
(c) Now assume that the market price of Amazon stock on the
grant date was $45 per share. Repeat the requirements for (a) and
(b).
(d) Amazon would like to implement an employee stock-purchase
plan for rank-and-file employees, but it would like to avoid
recording expense related to this plan. Which of the following
provisions must be in place for the plan to avoid recording
compensation expense?
(1) Substantially all employees may participate.
(2) The discount from market is small (less than 5%).
(3) The plan offers no substantive option feature.
(4) There is no preferred stock outstanding.
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