1.
Prepare the schedule of Corporation C’s compensation calculations for its compensatory share option plan for 2019 to 2021.
1.
Explanation of Solution
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 C’s compensation calculations for its compensatory share option plan for 2019 to 2021:
Particulars | 2019 | 2020 | 2021 |
Estimated (actual) total compensation cost | $41,405 | $60,060 | $95,875 |
Fraction of service expired | × 1/3 years | × 2/3 years | × 3/3 years |
Estimated compensation expense to date | $13,802 | $40,040 | $95,875 |
Previously recognized compensation expense | 0 | (13,802) | (40,040) |
Current compensation expense | $13,802 | $26,238 | $55,835 |
Table (1)
Working Note 1: Compute the total compensation cost of options for the year 2019:
Working Note 2: Compute the total compensation cost of options for the year 2020:
Working Note 3: Compute the total compensation cost of options for the year 2021:
2.
Prepare Corporation C’s memorandum entry for the grant date and
2.
Explanation of Solution
Prepare Corporation C’s memorandum entry for the grant date:
Memorandum entry: On January 1, 2019, the company granted performance-based compensatory share options to 70 executives. The plan allows each executive to exercise 100 options to acquire the same number of shares of company’s common stock at an exercise price of $50 per share and vest at the end of service period of 3 years. The estimated fair value of the options expected to be exercised is $41,405.
Prepare the journal entries for 2019 to 2022 related to the compensation plan:
Date | Accounts title and Explanation | Post ref. | Debit ($) | Credit ($) |
December | Compensation Expense | 13,802 | ||
31, 2019 | Paid-in Capital from Share Options | 13,802 | ||
(To record compensation expense for 2019) |
Table (2)
To record compensation expense for 2019:
- Compensation Expense is an expense account. Expenses and losses decrease Equity account. Therefore, debit Compensation Expense account with $13,802.
- Paid-in Capital from Share Options is a shareholders’ equity account. Since share options are granted, company’s stock amount has increased. Therefore, credit Paid-in Capital from Share Options account with $13,802.
Date | Accounts title and Explanation | Post ref. | Debit ($) | Credit ($) |
December | Compensation Expense | 26,238 | ||
31, 2020 | Paid-in Capital from Share Options | 26,238 | ||
(To record compensation expense for 2020) |
Table (3)
To record compensation expense for 2020:
- Compensation Expense is an expense account. Expenses and losses decrease Equity account. Therefore, debit Compensation Expense account with $26,238.
- Paid-in Capital from Share Options is a shareholders’ equity account. Since share options are granted, company’s stock amount has increased. Therefore, credit Paid-in Capital from Share Options account with $26,238.
Date | Accounts title and Explanation | Post ref. | Debit ($) | Credit ($) |
December | Compensation Expense | 55,835 | ||
31, 2021 | Paid-in Capital from Share Options | 55,835 | ||
(To record compensation expense for 2021) |
Table (4)
To record compensation expense for 2021:
- Compensation Expense is an expense account. Expenses and losses decrease Equity account. Therefore, debit Compensation Expense account with $55,835.
- Paid-in Capital from Share Options is a shareholders’ equity account. Since share options are granted, company’s stock amount has increased. Therefore, credit Paid-in Capital from Share Options account with $55,835.
Date | Accounts title and Explanation | Post ref. | Debit ($) | Credit ($) |
January 13, 2022 | Cash | 150,000 | ||
Paid-in Capital From Share Options | 48,750 | |||
Common Stock | 15,000 | |||
Additional Paid-in Capital on Common Stock | 183,750 | |||
(To record purchase options exercised by share option holders) |
Table (5)
To record purchase options exercised by share option holders:
- Cash is an asset account. Since share options are exercised and shares are purchased for cash, cash is received. Therefore, debit Cash account with $115,000.
- Paid-in Capital from Share Options is a shareholders’ equity account. Since share options which are granted are exercised, the entry is reversed and cancelled for options exercised. Therefore, debit Paid-in Capital from Share Options account with $48,750.
- Common Stock is a shareholders’ equity account. Since share options which are granted are exercised and shares are sold, common stock amount increased. Therefore, credit Common Stock account with $15,000.
- Additional Paid-in Capital on Common Stock is a shareholders’ equity account. Since share options which are granted are exercised and shares are sold for more than par value, additional capital amount increased. Therefore, credit Additional Paid-in Capital on Common Stock account with $183,750.
3.
Prepare shareholders’ equity section that reporting the accounts related to compensation plan of Corporation C on December 31, 2020.
3.
Explanation of Solution
Prepare shareholders’ equity section that reporting the accounts related to compensation plan of Corporation C on December 31, 2020:
Corporation R | |
Shareholders' Equity (Partial) | |
December 31, 2020 | |
Contributed capital | |
Paid-in capital from share options | $40,040 |
Table (6)
4.
Identify whether there is a problem with the answer to requirement 3 and the eventual value of the vested share options. Explain the ways to avoid the problem, if any.
4.
Explanation of Solution
Identify whether there is a problem with the answer to requirement 3 and the eventual value of the vested share options:
The problem was that the actual compensation cost in 2021 was more than the estimated compensation cost in 2020.
This is due to more number of shares granted for the increase in market share.
The ways to avoid the problem:
This problem would have been avoided, if less number of shares would have been granted as a performance based increase in market share.
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Chapter 15 Solutions
Intermediate Accounting: Reporting And Analysis
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