as an attempt to keep the important employees, and to give the employees a reason to help the company get a bigger market share. With a stock option, an employee may get 100 shares of stock after they are with the company for five years. Once the five years is up the employee has the option to keep the shares and watch them grow, or they can take the cash equivalent of the shares. If the employee decided to take the cash, it would be like a debt to the company. However if the employee wants to watch the stocks grow, it would be as if the option was always equity. How should an accountant look at a stock option? Should they consider it a debt or equity? Or should they account for it as both?First I will explain the debt or equity method. This is quite simple. The hard part comes when deciding which method of the two to use. A good way to decide this is to figure out if most stock options become debt or equity. Once the method is decided the business can account for it. They must decide if, like in the 100 shares example above, they want to account for 20 shares or all of it at once. Say the company decides to account for 20 shares a year, the shares are at $25 after an employee's first year, and they are using the debt method. The journal entry for this is shown below:Intangible Asset500Accounts Payable500I am not positive what the asset would be called in this particular example, but it would be an intangible asset. If this were the equity method, the credit account would be common stock. This would be the entry every year until the five years are up, assuming that the price per share stays the same. Then it is decision time for the employee. Below are the journal entries for either decision:Employee takes the cashAccounts Payable2500Cash2500Employee takes the stocksAccounts Payable2500Common Shares2500As shown, either entry wipes the liability away, and either creates equity or decreases cash. This is a very simple way...
