Concept explainers
(1)
Stock options: Stock options are the stock-based compensation plans provided in the form of an option to buy certain number of shares for a certain price during certain period.
To determine: The compensation cost of stock options
(1)
Explanation of Solution
Compute the total compensation cost of stock options.
(2)
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 for compensation expense on December 31, 2018, 2019, 2020.
(2)
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 | 12,000,000 | ||
Paid-In Capital–Stock Options | 12,000,000 | ||||
(To record compensation expense) |
Table (1)
Explanation:
- Compensation Expense is an expense account. Since expenses decrease stockholders’ equity, and a decrease in stockholders’ equity is debited.
- Paid-in Capital–Stock Options is a stockholders’ equity account. Since stock options are considered as earned by the employee, stockholders’ equity increased, and an increase in equity is credited.
Working Notes:
Compute the compensation cost allocated each year.
Note: Refer to Equation(1) for the value and computation of compensation cost.
Prepare journal entry to record the tax effect of compensation expense on December 31, 2018.
Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) | |
2018 | |||||
December | 31 | 4,800,000 | |||
Income Tax Expense | 4,800,000 | ||||
(To record income tax expense) |
Table (2)
- Deferred Tax Asset is an asset account. Since the stock options are not qualified as incentive plans, tax expense is recorded on compensation expense for which the tax deduction is available in future. To record this tax benefit, which is accounted as the tax expense payment in advance, this account is debited.
- Income Tax Expense is an expense account. Since tax expense is reduced for accounting purposes, tax expense is credited.
Working Notes:
Compute the deferred tax asset amount allocated.
Note: Refer to Equation (2) for the value and computation of compensation expense.
Prepare journal entry for compensation expense on December 31, 2019.
Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) | |
2019 | |||||
December | 31 | Compensation Expense | 12,000,000 | ||
Paid-In Capital–Stock Options | 12,000,000 | ||||
(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.
- Paid-in Capital–Stock Options is a stockholders’ equity account. Since stock options are considered as earned by the employee, stockholders’ equity increased, and an increase in equity is credited.
Note: Refer to Equation (2) for value and computation of compensation expense.
Prepare journal entry to record the tax effect of compensation expense on December 31, 2019.
Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) | |
2019 | |||||
December | 31 | Deferred Tax Asset | 4,800,000 | ||
Income Tax Expense | 4,800,000 | ||||
(To record income tax expense) |
Table (4)
- Deferred Tax Asset (DTA) is an asset account. Since the stock options are not qualified as incentive plans, tax expense is recorded on compensation expense for which the tax deduction is available in future. To record this tax benefit, which is accounted as the tax expense payment in advance, this account is debited.
- Income Tax Expense is an expense account. Since tax expense is reduced for accounting purposes, tax expense is credited.
Note: Refer to Equation (3) for value and computation of deferred tax asset.
Prepare journal entry for compensation expense on December 31, 2020.
Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) | |
2020 | |||||
December | 31 | Compensation Expense | 12,000,000 | ||
Paid-In Capital–Stock Options | 12,000,000 | ||||
(To record compensation expense) |
Table (5)
- Compensation Expense is an expense account. Since expenses decrease stockholders’ equity, and a decrease in stockholders’ equity is debited.
- Paid-in Capital–Stock Options is a stockholders’ equity account. Since stock options are considered as earned by the employee, stockholders’ equity increased, and an increase in equity is credited.
Note: Refer to Equation (2) for value and computation of compensation expense.
Prepare journal entry to record the tax effect of compensation expense on December 31, 2020.
Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) | |
2020 | |||||
December | 31 | Deferred Tax Asset | 4,800,000 | ||
Income Tax Expense | 4,800,000 | ||||
(To record income tax expense) |
Table (6)
- Deferred Tax Asset (DTA) is an asset account. Since the stock options are not qualified as incentive plans, tax expense is recorded on compensation expense for which the tax deduction is available in future. To record this tax benefit, which is accounted as the tax expense payment in advance, this account is debited.
- Income Tax Expense is an expense account. Since tax expense is reduced for accounting purposes, tax expense is credited.
Note: Refer to Equation (3) for value and computation of deferred tax asset.
(3)
To journalize: The exercise of options
(3)
Explanation of Solution
Journalize the entry for options exercised.
Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) | |
2022 | |||||
August | 21 | Cash | 132,000,000 | ||
Paid-in Capital – Stock Options | 36,000,000 | ||||
Common Stock | 6,000,000 | ||||
Paid-in Capital–Excess of Par | 162,000,000 | ||||
(To record options exercised by stock option holders) |
Table (7)
- Cash is an asset account. Since cash is received, asset value increased, and an increase in asset is debited.
- Paid-in Capital–Stock Options is a stockholders’ equity account. Since stock options are exercised and shares are issued, stock options value is decreased, and a decrease in equity is debited.
- Common Stock is a stockholders’ equity account. Since stock options are exercised and shares are issued, common stock value increased, and an increase in equity is credited.
- Paid-in Capital–Excess of Par is a stockholders’ equity account. Since stock options are exercised and shares are issued, excess of par value increased, and an increase in equity is credited.
Working Notes:
Compute cash received by Corporation J.
Compute the paid-in capital of stock options amount.
Compute the common stock amount.
Compute the paid-in capital–excess of par amount.
Note: Refer to Equations (4), (5), and (6) for all the values.
Journalize the entry for tax effect if all the options are exercised.
Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) | |
2022 | |||||
August | 21 | Income Taxes Payable | 12,000,000 | ||
Income Tax Expense | 2,400,000 | ||||
|
14,400,000 | ||||
(To record income taxes payable) |
Table (8)
- Income Taxes Payable is a liability account. Since the tax expense is recognized in advance, the future tax liability is reduced, and a reduction in liability is debited.
- Income Tax Expense is an expense account. Since DTA is recognized, the future tax benefit is recorded.
- Deferred Tax Asset (DTA) is an asset account. Since the tax expense which is paid in advance is recognized on exercise date, asset is reduced and a reduction in asset is credited.
Working Notes:
Compute income taxes payable amount.
Compute DTA for the years 2016 and 2017.
Compute paid-in capital.
Note: Refer to Equations (8), and (9) for the value and computation of income taxes payable and DTA.
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Chapter 19 Solutions
INTERMEDIATE ACCOUNTING W/CONNECT
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