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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 Plan On January 1, 2019, Rhine Company adopts a performance-based share option plan for its 80 key executives. Each executive is granted a maximum of 70 share options, but the number of options that vest depends on the percentage increase in Rhine’s sales over a 3-year service period. If by December 31, 2021, sales have increased by at least 10%, 50 options will vest for each executive; if sales have increased by at least 15%, all 70 options will vest. On the grant date, Rhine estimates that its sales will increase by 12% over the service period, and that its employee turnover rate over the 3-year service period will be 6%. It also determines that the fair value of an option expected to vest is $13.40. At the end of 2018, actual sales had increased by 16% for the service period, and the actual turnover was 6 key executives for the service period.

Required:

  1. 1. Prepare a schedule of Rhine’s computations for its compensatory share option plan for 2019 through 2021 (round all computations to the nearest dollar).
  2. 2. Prepare the compensation expense journal entry for 2019.

1.

To determine

Prepare a schedule of Company R for the computation of its compensatory share option plan for 2019 through 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.

Prepare a schedule of Corporation P’s compensation computation for its compensatory share option plan for 2019:

Particulars201920202021
Total compensated cost ($14×200×50×0.85)$50,384$50,384$69,412
Fraction of service period expiredOne-thirdOne-thirdOne-third
Compensation expense $16,795$33,589$69,412
Previously recognized compensation expense(0)($16,795)($33,589)
Current compensation expense$16,795$16,794$35,823

Table (1)

Compute the total compensation cost of options for the year 2019 (since 12% increase in sales is estimated, 50 options could be availed).

Total compensation cost of options} = {Fair market value per share × Number of options expected to vest}{$13.40 × (50 options×80 executives)×(100%6%)retention rate}= $13.40 × 50 options×80 executives×94%= $50,384

Compute the total compensation cost of options for the year 2020 (since 12% increase in sales is estimated, 50 options could be availed).

Total compensation cost of options} = {Fair market value per share × Number of options expected to vest}{$13.40 × (50 options×80 executives)×(100%6%)retention rate}= $13.40 × 50 options×80 executives×94%= $50,384

Compute the total compensation cost of options for the year 2021 (since 16% increase in sales is estimated, 70 options could be availed).

Total compensation cost of options} = {Fair market value per share × Number of options actually vested}= $13

2.

To determine

Prepare a journal entry to record the compensation expense for 2019.

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