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AccountingIntermediate Accounting: Reporting And Analysis3rd Edition

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Chapter 15, Problem 3P
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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Fixed Share Option Compensation Plan On January 1, 2019, Roswall Corporation’s common stock is selling for $55 per share. On this date, Roswall creates a compensatory share option plan for its 60 key employees. The plan document states that each employee may purchase 500 shares of its $10 par common stock for $55 per share after working for the company for 3 years. On this date, based on an option pricing model, Roswall estimates that each option has a value of $18. Roswall expects that employee turnover rate will be 15% over the service period. Because of lower turnover, at the end of 2020, Roswall changes its estimated turnover rate to 12% = for the entire service per iod. At the end of 2021, the Options vest for 54 employees. On January 13, 2022, 10 executives exercise their options when the stock is selling for $75 per share.

Required:

  1. 1. Prepare a schedule of Roswall’s compensation computations for its compensatory share option plan for 2019 through 2021 (round all compilations to the nearest dollar).
  2. 2. Prepare Roswall’s memorandum entry for the gram date and journal entries for 2019 through 2022 in regard to this plan.
  3. 3. Show how the account(s) related to the plan is (are) reported in the shareholders’ equity section of Roswall’s balance sheet on December 31, 2017.

1.

To determine

Prepare the schedule of Corporation R’s compensation calculations for its compensatory share option plan for 2019 to 2021.

Explanation

Share option plan: This is an option given to an employee to buy a certain number of shares of stock of the company at a pre-determined price during certain period of time.

Fixed share option compensation plan: As the name implies, the compensation plan fixes the exercise price and the number of shares to be vested, on the grant date.

Prepare the schedule of Corporation R’s compensation calculations for its compensatory share option plan for 2019 to 2021:

Particulars201920202021
Estimated (actual) total compensation cost$459,000 $475,200 $486,000
Fraction of service expired× 1/3 years×  2/3  years×  3/3 years
Estimated compensation expense to date$153,000$316,800$486,000
Previously recognized compensation expense0(153,000)(316,800)
Current compensation expense$153,000$163,800$169,200

Table (1)

Working Note 1: Compute the total compensation cost of options for the year 2019:

Total compensation cost of options} = {Fair market value per share × Number of options expected to vest}= {$18 × 500 shares×60 executives×(100%–15%)retention rate}= $18 × 500 shares

2.

To determine

Prepare Corporation R’s memorandum entry for the grant date and journal entries for 2019 to 2022 related to this plan.

3.

To determine

Prepare shareholders’ equity section that reporting the accounts related to compensation plan of Corporation R on December 31, 2017.

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