Detailed Answer
(a) The net increase in stockholders’ equity (SE) as a
result of the grant and exercise of the options is equal to the increase
in cash (1,000 shares × $20 option price = $20,000). The
journal entry to record the options has no effect on SE because a
SE account will be credited while a contra SE account will be
debited as follows:
Deferred compensation 28,000
Paid-in capital stock options 28,000
(1,000 shares × $28 per option)
The entry to recognize compensation expense has no effect on
SE because the debit decreases SE while the credit increases SE
by reducing the contra account as follows:
Compensation expense 28,000
Deferred compensation 28,000
The only entry which does affect SE is the entry for the exercise
of the options, which decreases SE by $28,000 while increasing it
by $48,000 (a net increase of $20,000).
Cash (1,000 × $20) 20,000
Paid-in capital stock options (1,000 × $28) 28,000
Common stock (1,000 × $10) 10,000
Paid-in capital in × of PV (plug) 38,000
Thus, the net increase in stockholders’ equity is $20,000.