Lesson: Stock Option Expiration

Instructor: Nick Palazzolo

In this lesson, Nick Palazzolo, CPA, delves into the mechanics of stock option expiration, highlighting the financial reporting implications when stock options go unexercised. He details the specific journal entries needed to reclassify the remaining balance from additional paid-in capital to an expired stock options account. These entries are important for ensuring the financial statements accurately reflect the lapse of these options. Nick provides a clear example of this process, using hypothetical figures to illustrate adjustments in cases where only a portion of the options are exercised before expiration, reinforcing the concept that compensation expense remains unaffected due to it being retrospective in nature.

Updated: Oct. 20, 2021 Create an account

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Transcript

Instructor: Nick Palazzolo

Nick Palazzolo is head instructor of ExamPrep.ai CPA Review. Nick's teaching style is engaging & upbeat, combining practical Big 4 tax & assurance expertise with years of 1-on-1 coaching. His lessons are concise and emphasize what you need to know to pass. Whether you're a recent grad or working full-time, we’re confident you can conquer your CPA exams with Nick’s review.

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Stock option expiration. So let's say that the fair market value did not go above 50. And there's no reason for the employees to exercise the options because they expired worthless, right? You wouldn't buy stock for more than it's worth on the open market. Well, expiration of options requires a reclassification of the remaining balance in additional paid in capital stock options, account reclassification is accomplished by means of the following entry.

So this is essentially just the journal entry to account for them being expired. So, again, this is what you would credit twice for the $50,000 for each of the two years, and then you would reverse that out and you're now crediting expired stock options. Just kind of a one off entry if you ever need to know it. And not too common, but definitely know it if you can fit it into that very packed brain of yours, right? Compensation expense is not affected by the expiration of options because it's like salaries and wage expense. It's already happened. It's reporting what has happened. Right? It's the income statement account. So that's just a report over the period last slide here.

So what about a theoretical? Well, assume in the previous example, only one half of the options were exercised. The journal entry to record the exercise of the options is the same. It's the same, right? Same accounts. But here we're dealing with half of the numbers, right? So it was 10,000 options. Now we're dealing with 5,000. It's literally just half everything's half. You see here, it's all half the numbers.

And then if the remaining options expire, the APIC stock options account would have to be reclassified as expired. So, this is taking into account the previous two slides we saw, just

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Financial Accounting Basics

Module: 2 Concepts, 18 Lessons

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Revenue Recognition Objectives

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