Restricted stock units; cash settlement
• Appendix B
As part of its stock-based compensation package, on January 1, 2018, International Electronics granted restricted stock units (RSUs) representing 50 million $1 par common shares. At exercise, holders of the RSUs are entitled to receive cash or stock equal in value to the market price of those shares at exercise. The RSUs cannot be exercised until the end of 2021 (vesting date) and expire at the end of 2023. The $1 par common shares have a market price of $6 per share on the grant date. The fair value at December 31, 2018, 2019, 2020, 2021, and 2022, is $8, $6, $8, $5, and $6, respectively. All recipients are expected to remain employed through the vesting date. After the recipients of the RSUs satisfy the vesting requirement, the company will distribute the shares.
Required:
1. Prepare the appropriate
2. Prepare the appropriate journal entries pertaining to the RSUs on December 31, 2018–December 31, 2021.
3. The RSUs remain unexercised on December 31, 2022. Prepare the appropriate journal entry on that date.
4. The RSUs are exercised on June 6, 2023, when the share price is $6.50, and executives choose to receive cash. Prepare the appropriate journal entry(s) on that date.
(1)
Restricted stock units (RSUs): RSU is a right of the employee to receive a certain number of shares of stock of the company as a performance incentive, or usual compensation, or signing bonus.
Journal entry: Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.
Debit and credit rules:
- Debit an increase in asset account, increase in expense account, decrease in liability account, and decrease in stockholders’ equity accounts.
- Credit decrease in asset account, increase in revenue account, increase in liability account, and increase in stockholders’ equity accounts.
To journalize: The entry to record the grant of RSUs on January 1, 2018
Explanation of Solution
If the employee chooses to issue cash or shares, the RSUs are considered as liability. In the given case, employees are given the right to choose either cash or stock. The compensation expense is recorded over the service period. Since the RSUs are considered as liability, those should be adjusted each year, to reflect the fair value, until the RSUS are paid. The estimated periodic compensation expense of prior years is reduced to adjust the expense. Since the compensation expense would be recognized only after the completion of one year, do not record any entry for this transaction on the grant date.
(2)
To journalize: The entries related to RSUs from December 31, 2018 to December 31, 2021
Explanation of Solution
Prepare journal entry for compensation expense on December 31, 2018.
Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) | |
2018 | |||||
December | 31 | Compensation Expense | 100,000,000 | ||
Liability–RSUs | 100,000,000 | ||||
(To record compensation expense) |
Table (1)
- Compensation Expense is an expense account. Since expenses decrease stockholders’ equity, and a decrease in stockholders’ equity is debited.
- Liability–RSU is a liability account. Since shares or cash should be paid by the company, liability has increased, and an increase in liability is credited.
Working Notes:
Compute compensation expense for 2018.
Prepare journal entry for compensation expense on December 31, 2019.
Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) | |
2019 | |||||
December | 31 | Compensation Expense | 50,000,000 | ||
Liability–RSUs | 50,000,000 | ||||
(To record compensation expense) |
Table (2)
- Compensation Expense is an expense account. Since expenses decrease stockholders’ equity, and a decrease in stockholders’ equity is debited.
- Liability–RSUs is a liability account. Since shares or cash should be paid by the company, liability has increased, and an increase in liability is credited.
Working Notes:
Compute compensation expense for 2019.
Note: Refer to Equation (1) for value and computation of compensation expense in 2018.
Prepare journal entry for compensation expense on December 31, 2020.
Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) | |
2020 | |||||
December | 31 | Compensation Expense | 150,000,000 | ||
Liability–RSUs | 150,000,000 | ||||
(To record compensation expense) |
Table (3)
- Compensation Expense is an expense account. Since expenses decrease stockholders’ equity, and a decrease in stockholders’ equity is debited.
- Liability–RSUs is a liability account. Since shares or cash should be paid by the company, liability has increased, and an increase in liability is credited.
Working Notes:
Compute compensation expense for 2020.
Note: Refer to Equations (1) and (2) for value and computation of compensation expense in 2018 and 2019.
Prepare journal entry for compensation expense on December 31, 2021.
Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) | |
2021 | |||||
December | 31 | Liability–RSUs | 50,000,000 | ||
Compensation Expense | 50,000,000 | ||||
(To record compensation expense) |
Table (4)
- Liability–RSUs is a liability account. Since fair value of share is much below till date, liability is decreased, and a decrease in liability is debited.
- Compensation Expense is an expense account. Since fair value of share is much below till date, the compensation expense is reduced, andthe account is credited.
Working Notes:
Compute compensation expense for 2021.
Note: Refer to Equations (1), (2) and (3) for value and computation of compensation expense in 2018, 2019, and 2020.
(3)
To prepare: Journal entry for the unexercised RSUs as on December 31, 2022
Explanation of Solution
Prepare journal entry to record unexercised RSUs as on December 31, 2022.
Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) | |
2022 | |||||
December | 31 | Compensation Expense | 50,000,000 | ||
Liability–RSUs | 50,000,000 | ||||
(To record liability adjustment when the rights are unexercised) |
Table (5)
- Compensation Expense is an expense account. Since the compensation expense is adjusted, the account is debited.
- Liability–RSUs is a liability account. Since RSUs are unexercised by the employees, liability is increased on adjustment, and increase in liability is credited.
Working Notes:
Compute the amount of liability as at December 31, 2022.
Note: Refer to Equations (1), (2), (3), and (4) for value and computation of compensation expense in 2018, 2019, 2020 and 2021.
(4)
To journalize: The entry for RSUs exercised on June 6, 2023
Explanation of Solution
Journalize the entry for options exercised.
Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) | |
2023 | |||||
June | 6 | Compensation Expense | 25,000,000 | ||
Liability–RSUs | 25,000,000 | ||||
(To record liability adjustment when the rights are exercised) |
Table (6)
- Compensation Expense is an expense account. Since the compensation expense is adjusted, the account is debited.
- Liability–RSUs is a liability account. Since RSUs are exercised by the employees, liability is increased on adjustment, and liability is credited.
Working Notes:
Compute the amount of liability as at June 6, 2023.
Note: Refer to Equations (1), (2), (3), (4), and (5) for value and computation of compensation expense in 2018, 2019, 2020, 2021 and 2022.
Journalize the payment of RSUs, which was a liability, as cash.
Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) | |
2023 | |||||
June | 6 | Liability–RSUs | 325,000,000 | ||
Cash | 325,000,000 | ||||
(To record payment of liability of RSUs) |
Table (7)
- Liability–RSUs is a liability account. Since RSUs are exercised, liability is decreased, and a decrease in liability is debited.
- Cash is an asset account. Since RSUs are exercised and cash is paid, asset is decreased, and a decrease in asset is credited.
Working Notes:
Compute the amount of cash to be paid for RSUs granted.
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INTERMEDIATE ACCOUNTING (LL) >CUSTOM<
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