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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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Performance-Based Share Option Compensation Plan Connors Company has 70 executives to whom it grants compensatory share options on January 1, 2019. The plan grants each executive option to acquire a maximum of 100 shares of the company’s $5 par common stock at $50 per share after completing 3 years of continuous service. However, the number of options that vest depends on the increase in the company’s market share over the 3-year period. The following schedule shows the number of options granted to each executive based on the increase in market share by the end of the service period:

Chapter 15, Problem 4P, Performance-Based Share Option Compensation Plan Connors Company has 70 executives to whom it grants

Based on past trends, on the grant date, Controls predicts that its market share wills increase about 3% by the end of 2021. At the end of 2020, due to its improved market position over the previous 2 years, Connors revises this estimate to 7%. At the end of 2021, Connors determines that its market share has increased 9% over the 3-year period.

On the grant date, Connors estimates that (1) the fair value of each option is $16.25, and (2) its employee turnover rate will be 9% over the service period. At the end of 2020, because of increased resignations, Connors changes its estin1ated turnover rate to 12% for the service period. At the end of 2021, 59 executives vest in the plan. On January 17, 2022, 30 executives exercise their options when the stock is selling for $68 per share.

Required:

  1. 1. Prepare a schedule of Connors’s compensation computations for its compensatory share option plan for 2019 through 2021 (round all computations to nearest dollar).
  2. 2. Prepare Connors’s memorandum entry on the date of grant 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 Connors’s balance sheet on December 31, 2020.
  4. 4. Next Level Do you see a problem with your answer to Requirement 3 and the eventual value of the vested share options? How might this problem be avoided?

1.

To determine

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

Particulars201920202021
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 expense0(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:

Total compensation cost of options} = {Fair market value per share × Number of options expected to vest}{$16.25 × (40 options×70 executives)×(100%9%)retention rate}= $16

2.

To determine

Prepare Corporation C’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 C on December 31, 2020.

4.

To determine

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.

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