close solutoin list

Performance-Based Share Option Compensation Plan On January 1, 2019, Pierce Company establishes a performance-based share option plan for its 80 top executives. The terms of the plan are that each executive is granted a maximum of 200 options alter completing a 3 year service period. The exact number of options granted, however, depends on the percentage increase in sales over the 3-year period. The terms are: (1) if sales increase between 0% and 3%, each executive is granted 90 options; (2) if sales increase between 4% and 6%, each executive is granted 140 options; and (3) if sales increase at least 7%, each executive is granted the maximum number of options. Each option entitles the executive to acquire one share of the company’s $10 par common stock at a price of $45. The options expire at the end of 4 years. On the grant date, Pierce uses an option pricing model to estimate that the fair value of each share option is $15, 50. Pierce’s employee turnover rate is expected to be 16% over the service period. At the end of 2020, because of lower turnover, Pierce revises its estimated turnover rate to 14% for the service period. At the end of 2021, options vest for 68 executives. On February 3, 2022, 50 executives exercise their options when the market price of the company’s common stock is $62 per share. During the remainder of the year, the market price declines so that at the end of 2022 the other 18 executives allow their options to expire. Based on a projection of past trends, on the grant date Pierce estimates that its sales will increase about 5% by the end of 2021. This estimate appears accurate through 2020. However, in the last half of 2021, sales increase so much that at the end of 2021 Pierce determines that its total sales have increased by 7% over the 3-year service period. All inventories are shipped by Pierce to its customers under FOB destination terms. Required: 1. Prepare a schedule of Pierce’s compensation computations for its compensatory share option plan for 2019 through 2021 (round all computations to the nearest dollar). 2. Prepare Pierce’s memorandum and journal entries for 2019 through 2022 in regard to this plan. 3. Show how the account(s) related to the plan is (are) reported in the shareholders’ equity section of Pierce’s December 31, 2020, balance sheet. 4. Next Level Do you see any problems with the way the terms of Pierce’s compensatory share option plan are structured? Explain.

BuyFind

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
Publisher: Cengage Learning
ISBN: 9781337788281
BuyFind

Intermediate Accounting: Reporting...

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

Solutions

Chapter
Section
Chapter 15, Problem 5P
Textbook Problem

Performance-Based Share Option Compensation Plan On January 1, 2019, Pierce Company establishes a performance-based share option plan for its 80 top executives. The terms of the plan are that each executive is granted a maximum of 200 options alter completing a 3 year service period. The exact number of options granted, however, depends on the percentage increase in sales over the 3-year period. The terms are: (1) if sales increase between 0% and 3%, each executive is granted 90 options; (2) if sales increase between 4% and 6%, each executive is granted 140 options; and (3) if sales increase at least 7%, each executive is granted the maximum number of options. Each option entitles the executive to acquire one share of the company’s $10 par common stock at a price of $45. The options expire at the end of 4 years.

On the grant date, Pierce uses an option pricing model to estimate that the fair value of each share option is $15, 50. Pierce’s employee turnover rate is expected to be 16% over the service period. At the end of 2020, because of lower turnover, Pierce revises its estimated turnover rate to 14% for the service period. At the end of 2021, options vest for 68 executives. On February 3, 2022, 50 executives exercise their options when the market price of the company’s common stock is $62 per share. During the remainder of the year, the market price declines so that at the end of 2022 the other 18 executives allow their options to expire.

Based on a projection of past trends, on the grant date Pierce estimates that its sales will increase about 5% by the end of 2021. This estimate appears accurate through 2020. However, in the last half of 2021, sales increase so much that at the end of 2021 Pierce determines that its total sales have increased by 7% over the 3-year service period. All inventories are shipped by Pierce to its customers under FOB destination terms.

Required:

  1. 1. Prepare a schedule of Pierce’s compensation computations for its compensatory share option plan for 2019 through 2021 (round all computations to the nearest dollar).
  2. 2. Prepare Pierce’s memorandum 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 Pierce’s December 31, 2020, balance sheet.
  4. 4. Next Level Do you see any problems with the way the terms of Pierce’s compensatory share option plan are structured? Explain.

Expert Solution

Want to see this answer and more?

Experts are waiting 24/7 to provide step-by-step solutions in as fast as 30 minutes!*

See Solution

*Response times vary by subject and question complexity. Median response time is 34 minutes and may be longer for new subjects.

Chapter 15 Solutions

Intermediate Accounting: Reporting And Analysis
Show all chapter solutions
Ch. 15 - How would you record the proceeds received from...Ch. 15 - If a corporation issues capital stock for an asset...Ch. 15 - What is a stock split? How do stock splits affect...Ch. 15 - If a French company using IFRS revalued its...Ch. 15 - What are restricted shares and share appreciation...Ch. 15 - What are the criteria for a noncompensatory share...Ch. 15 - Under the fair value method, how does a...Ch. 15 - What is the difference between a fixed...Ch. 15 - Define the following terms regarding preferred...Ch. 15 - How is a preferred stock similar to a long-term...Ch. 15 - What is treasury stock, and why might a...Ch. 15 - If a corporation uses the cost method to account...Ch. 15 - How does a corporation report the Treasury Stock...Ch. 15 - What accounting procedures are involved under the...Ch. 15 - What are the two components of a corporations...Ch. 15 - What additional disclosures about preferred and...Ch. 15 - On July 14, Peterman Corporation exchanged 1,000...Ch. 15 - Cary Corporation has 50,000 shares of 10 par...Ch. 15 - What is the most likely effect of a stock split on...Ch. 15 - Polk Corporation was organized on January 2, 2019,...Ch. 15 - During 2019, Bradley Corporation issued for 110...Ch. 15 - Amlin Corporation was incorporated on January 1,...Ch. 15 - On January 1, 2019, Stoner Corporation granted...Ch. 15 - When treasury stock is purchased for cash at more...Ch. 15 - Preferred stock that may be retired by the...Ch. 15 - When treasury stock accounted for by the cost...Ch. 15 - Brown Corporation issues 800 shares of its 5 par...Ch. 15 - Heart Corporation entered into a subscription...Ch. 15 - Blue Corporation issues 200 packages of securities...Ch. 15 - Sun Corporation issues 500 shares of 8 par common...Ch. 15 - Next Level Morgan Corporation issues 500 packages...Ch. 15 - Given the following information from Fire...Ch. 15 - On January 1, 2019, Phoenix Corporation adopts a...Ch. 15 - On January 2, 2019, Brust Corporation grants its...Ch. 15 - On January 1, 2019, Salt Lake Corporation grants...Ch. 15 - Assume Cole Corporation originally issued 300...Ch. 15 - Violet Corporation issues 1,200 shares of 150 par...Ch. 15 - Assume that Lily Corporation has outstanding 1,500...Ch. 15 - Tulip Corporation uses the cost method to account...Ch. 15 - Par Value and No-Par Stock Issuance Caswell...Ch. 15 - Combined Sale of Stock Maxville Company issues 300...Ch. 15 - Sale of Stock with Bonds Pilsen Company issues 12%...Ch. 15 - Issuance of Stock for Land Putt Company issues 500...Ch. 15 - Stock Subscription On February 3, 2019, Teel...Ch. 15 - Fixed Compensatory Share Option Plan Nadal Company...Ch. 15 - Fixed Share Option Compensation Plan On January 1,...Ch. 15 - Performance-Based Share Option Plan On January 1,...Ch. 15 - Restricted Share Units On January 2, 2019, Dekker...Ch. 15 - Share Appreciation Rights On January 1, 2019, as a...Ch. 15 - Convertible Preferred Stock On January 2, 2019,...Ch. 15 - Callable Preferred Stock On March 4, 2019, Hein...Ch. 15 - Stock Rights with Preferred Stock Nelson...Ch. 15 - Various Journal Entries Lodi Company is authorized...Ch. 15 - Treasury Stock, Cost Method On January 1, Lorain...Ch. 15 - Contributed Capital Adams Companys records provide...Ch. 15 - Treasury Stock Cost Method (and IFRS Revaluation)...Ch. 15 - Treasury Stock, Cost and Par Value Methods On...Ch. 15 - Treasury Stock, No Par Propst-Steele Production...Ch. 15 - Subscriptions On August 3, 2019, the date of...Ch. 15 - Stock Rights to Shareholders Nichols Electronics...Ch. 15 - Fixed Share Option Compensation Plan On January 1,...Ch. 15 - Performance-Based Share Option Compensation Plan...Ch. 15 - Performance-Based Share Option Compensation Plan...Ch. 15 - Share Appreciation Rights Holden Company has a...Ch. 15 - Issuances of Stock Cada Corporation is authorized...Ch. 15 - Issuances of Stock Epple Corporation is authorized...Ch. 15 - Comprehensive Young Corporation has been operating...Ch. 15 - Comprehensive The shareholders equity section of...Ch. 15 - Treasury Stock Analysis Ray Holt Corporation has...Ch. 15 - Comprehensive Byrd Companys Contributed Capital...Ch. 15 - Contributed Capital A partial list of the accounts...Ch. 15 - Contributed Capital The following is a partial...Ch. 15 - Reconstruct Journal Entries At the end of its...Ch. 15 - Treasury Stock, Cost Method Bush-Caine Company...Ch. 15 - Comprehensive Udall Corporations post-closing...Ch. 15 - Corporate Form of Organization Most large...Ch. 15 - Issuance of Security Packages Occasionally, a...Ch. 15 - Share Options A corporation has a non-compensatory...Ch. 15 - Capital Stock Capital stock is an important area...Ch. 15 - Treasury Stock A corporation sometimes engages in...Ch. 15 - Share Option Compensation Plans On November 6,...Ch. 15 - Share Appreciation Rights Instead of a fixed...Ch. 15 - Compensatory Share Option Plan Tom Twitlet,...Ch. 15 - Convertible Preferred Stock and Warrants The...Ch. 15 - Treasury Stock For numerous reasons, a corporation...Ch. 15 - Analyzing Coca-Colas Contributed Capital Obtain...Ch. 15 - Ethics and Share Options Smaller Corporation has...Ch. 15 - Researching GAAP Situation Russell International,...Ch. 15 - Researching GAAP Situation Bowsher Company had 10%...

Additional Business Textbook Solutions

Find more solutions based on key concepts
Show solutions
Why do options typically sell at prices higher than their exercise values?

Fundamentals of Financial Management (MindTap Course List)

ALTERNATIVE DIVIDEND POLICIES In 2013, Keenan Company paid dividends totaling 3,600,000 on net income of 10.8 m...

Fundamentals of Financial Management, Concise Edition (with Thomson ONE - Business School Edition, 1 term (6 months) Printed Access Card) (MindTap Course List)

What is a share premium?

Corporate Financial Accounting