Employee Stock Options. Equity-Classified Awards. Journal Entries. Davidson Company compensates its key employees by offering stock options as part of total compensation. On January 1 of the current year Davidson granted 80 000 options to acquire 80.000 shares of its $1 par value common stock at an exercise price of $37 per share. The market price on the date of the grant is also $37 per share so there is no intrinsic value. At grant date the fair value of the options is $4 000,000 or $50 per option. The initial vesting probability is assumed to be 60%. The option plan qualifies as an equity-classified award. There is a 2-year vesting period required before employees can purchase the shares.
Required
- a. Assuming no changes in vesting probability prepare the journal entries required to record compensation expense over the vesting period
- b. Prepare all journal entries required in Year 2 assuming that the vesting probability increases to 80% in Year 2 Assume that the company chooses to adjust the fair value for the estimated forfeitures
- c. Assume that employees exercise 80% of the options expected to vest from part (b) and the other 20% expire. Prepare any journal entries required to record the exercise and expirations
- d. Assume that 20% of the options are forfeited in Year 1 and another 20% are forfeited in Year 2. Assume that the company accounts for forfeitures when they occur. Prepare all journal entries in Year 1 and Year 2, including the
journal entry to record the exercise of the options.
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Chapter 19 Solutions
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- On January 1, 2021, Tru Fashions Corporation awarded restricted stock units (RSUs) representing 10 million of its $1 par common shares to key personnel, subject to forfeiture if employment is terminated within three years. After the recipients of the RSUs satisfy the vesting requirement, the company will distribute the shares. On the grant date, the shares had a market price of $7.50 per share. Required: 1. Determine the total compensation cost pertaining to the RSUs.2. Prepare the appropriate journal entry to record the award of RSUs on January 1, 2021.3. Prepare the appropriate journal entry to record compensation expense on December 31, 2021.4. Prepare the appropriate journal entry to record compensation expense on December 31, 2022.5. Prepare the appropriate journal entry to record compensation expense on December 31, 2023.6. Prepare the appropriate journal entry to record the lifting of restrictions on the RSUs and issuing shares at December 31, 2023.arrow_forwardAllied Paper Products, Inc., offers a restricted stock award plan to its vice presidents. On January 1, 2021, the company granted 18 million of its $1 par common shares, subject to forfeiture if employment is terminated within two years. The common shares have a market price of $6 per share on the grant date. Required: 1. Determine the total compensation cost pertaining to the restricted shares.2. Prepare the appropriate journal entries related to the restricted stock through December 31, 2022.arrow_forwardOn January 1, 2021, Tru Fashions Corporation awarded restricted stock units (RSUs) representing 25 million of its $1 par common shares to key personnel, subject to forfeiture if employment is terminated within three years. After the recipients of the RSUs satisfy the vesting requirement, the company will distribute the shares. On the grant date, the shares had a market price of $3.30 per share. Required: 1. Determine the total compensation cost pertaining to the RSUs.2. Prepare the appropriate journal entry to record the award of RSUs on January 1, 2021.3. Prepare the appropriate journal entry to record compensation expense on December 31, 2021.4. Prepare the appropriate journal entry to record compensation expense on December 31, 2022.5. Prepare the appropriate journal entry to record compensation expense on December 31, 2023.6. Prepare the appropriate journal entry to record the lifting of restrictions on the RSUs and issuing shares at December 31, 2023. Please help and show formulaarrow_forward
- Taxon Corp. granted stock options representing the right to purchase 30 million of its $1 par common shares to executives, subject to forfeiture if employment is terminated within three years. After the recipients of the options satisfy the vesting requirement, the company will allow executives to trade those options. The options had a market price of $8 per share on the grant date. Currently (as of the reporting date) the market price of the options are $24 per share. Ignoring taxes, what is the effect on earnings in the year that the shares are granted to executives? A) $0. B) $30 million. C) $80 million. D) $240 million. O A O B O Darrow_forwardOn January 1, 2018, Choosy Co. granted to an employee the right to choose either shares or cash payment. The choices are as follows: • Share Alternative: Equal to 25,000 shares with par value of P40. • Cash Alternative: Cash payment equal to the market value of 21,000 shares. The grant is conditional upon the completion of three years of service. On the grant date, on January 1, 2018, the share price P36. The share prices for the three year period are as follows: December 31, 2018 P46 December 31, 2019 P54 December 31, 2020 P60 After taking into account the effect of vesting restriction, Choosy Co. has estimated that the fair value of the share alternative is P45. 1. What is the compensation to be recognized in December 31, 2018? 2. What is the compensation to be recognized in December 31, 2019? 3. What is the compensation to be recognized in December 31, 2020? 4. Assuming on December 31, 2020 the employee opted to receive the Cash Alternative, what is the share premium to be…arrow_forwardIn connection with a stock option plan for the benefit of key employees, ABC Co. intends to distribute treasury shares when the options are exercised. These shares were bought in 20x3 at P42 per share. On January 1, 20x4, ABC Co. granted stock options for 100,000 shares at P38 per share as additional compensation for services to be rendered over the next 3 years. The options are exercisable during a 2-year period beginning January 1, 20x7, by grantees still employed by ABC Co. Market price of the ABC Co.’s stock was P47 per share at the grant date. The fair value of the stock option is P12 on grant date. No stock options were terminated during 20x4. Compute the amount of expense that should be recognized for 20x4.arrow_forward
- On January 1, 2021, Summer Fashions Corp. awarded restricted stock units (RSUS) representing 5 million of its $1 par common shares to key personnel, subject to forfeiture if employment is terminated within three years. After the recipients of the RSUS satisfy the vesting requirement, the company will distribute the shares. On the grant date, the shares had a market price of $9.00 per share. The journal entry to record the lifting of restrictions on the RSUS and issuing shares at December 31, 2023, would include a: O Credit to Paid-in capital - restricted stock $45 million O None of the options listed. O Credit to Paid-in capital - restricted stock $15 million O Debit to Paid-in capital - restricted stock $45 million O Debit to Paid-in capital - restricted stock $15 million • Previousarrow_forwardAllied Paper Products, Incorporated offers a restricted stock award plan to its vice presidents. On January 1, 2024, the company granted 16 million of its $1 par common shares, subject to forfeiture if employment is terminated within two years. The common shares have a market price of $5 per share on the grant date. Required: Determine the total compensation cost pertaining to the restricted shares. Prepare the appropriate journal entries related to the restricted stock through December 31, 2025.arrow_forwardMarie Drugs offered an incentive stock option plan to its employees. On January 1, 2015, options were granted for sixty thousand $0.2 par common shares. The exercise price, $5, equals the market price of the common stock on the grant date. The options cannot be exercised before January 1, 2018, and expire December 31, 2021. Each option has a fair value of $1 based on an option pricing model. Which is the correct entry to record compensation expense for the year 2015?arrow_forward
- On 1/1/2013, a company grants 1,000 options to its CEO with an exercise price of $40 as compensation. The options vest after two years and expire after 10 years. The stock price is $40 on the grant date. The fair value of the options is $20 per share at the grant date. How much compensation expense for stock options will the company recognize in fiscal year 2013? $20,000 $40,000 $0 $10,000 $13,500 O O O O Oarrow_forwardPastore Incorporated granted options for 1 million shares of its $1 par common stock at the beginning of the current year. The exercise price is $31 per share, which was also the market value of the stock on the grant date. The fair value of the options was estimated at $9.00 per option. What would be the total compensation indicated by these options?arrow_forward(Stock-Appreciation Rights) Capulet Company establishes a stock-appreciation rights program that entitles its new president Ben Davis to receive cash for the difference between the market price of the stock and a pre-established price of $30 (also market price) on December 31, 2013, on 30,000 SARs. The date of grant is December 31, 2013, and the requiredemployment (service) period is 4 years. President Davis exercises all of the SARs in 2019. The fair value of the SARs is estimated to be $6 per SAR on December 31, 2014; $9 on December 31, 2015; $15 on December 31, 2016; $6 on December 31, 2017; and $18 on December 31, 2018.Instructions(a) Prepare a 5-year (2014–2018) schedule of compensation expense pertaining to the 30,000 SARs granted president Davis.(b) Prepare the journal entry for compensation expense in 2014, 2017, and 2018 relative to the 30,000 SARs.arrow_forward