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Client X offers employees a stock option plan where the exercise price of the stock is equal to the market price at the date of grant. These types of plans are accounted for as equity transactions where an asset or expense is debited, and an equity account is credited—paid-in capital.
Typically, a stock option plan contains a vesting period which is basically the period that the employee must wait before exercising their stock options. When accounting for stock options under Generally Accepted Accounting Principles (GAAP), a company must record an expense at the end of each fiscal period during the vesting period; however, it is important to note that there is not a journal entry at the grant date. The fair value of the stock options is determined at the grant date as well as the estimated number of stock options that are expected to vest (Hernandez, n.d., p. 154). The product of the stock options expected to vest and the fair value of the stock at the grant date is then divided over the vesting period for a journal entry to record compensation expense and additional paid in capital at the end of each fiscal period. Once the options vest and are exercised by employees, the APIC account is reversed and the common stock account is now credited. The product of the amount of options exercised and the exercise price per share is debited to cash (Wall Street Prep, 2020).
In 175 words Point out all of the cons in describe how Client X should account for its employee stock option plan under existing GAAP.