to account for the stock option.Another method to account for this is with a combination of both the debt and equity methods. The one major decision here is how the company wants to split up the stock option. An easy way would be 50/50, but the way I will split it up is with a 20/80 percentage. I would split it up this way assuming that 20% of the employees take the cash and 80% take the stocks. Below are the journal entries for each year:Intangible Asset500Accounts Payable100Common Shares400This would be a very efficient way of accounting for the stock options. There will not be many changes in amounts when the employee has the option. This would be the entry for five years, and then the employee will have their option. Below is the journal entries for both decisions:Employee takes the cashCommon Shares2000Accounts Payable 500Cash2500Employee takes the stockAccounts Payable 500Common Shares 500Again, both methods clear out the accounts payable. Also the employee is receiving the cash or common shares in the right amount.Debt and equity methods are important decisions when deciding what to do with an instrument like stock options. All three methods, debt, equity, or a combination, are helpful in keeping the books correct and fair until the employee exercises their option. The best method in my mind is the combination of methods. It best shows were the money will go on average before the option is decided on. However the other two methods are also important considering the pros and cons of each decision. No clear answer, however, will ever be known as long as accounting exists....
