Company Co. has 1,000 employees and it decides to grant each of the employees 200 share options as part of its new rewards plan. The options are exercisable over 5 years and subject only to the condition that the company's stock price must be at least 30% higher than its original issue price. Company Co.'s share-based payments are subject to: Non-market performance conditions Service condition Service and market performance conditions Non-vesting condition

Company Co. has 1,000 employees and it decides to grant each of the employees 200 share options as part of its new rewards plan. The options are exercisable over 5 years and subject only to the condition that the company's stock price must be at least 30% higher than its original issue price. Company Co.'s share-based payments are subject to: Non-market performance conditions Service condition Service and market performance conditions Non-vesting condition

Intermediate Accounting: Reporting And Analysis

3rd Edition

ISBN:9781337788281

Author:James M. Wahlen, Jefferson P. Jones, Donald Pagach

Publisher:James M. Wahlen, Jefferson P. Jones, Donald Pagach

Chapter15: Contributed Capital

Section: Chapter Questions

Problem 9E: Restricted Share Units On January 2, 2019, Dekker Company grants each of its 15 new employees 200...

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You hold a 25% common stock interest in YouOwnIt, a family-owned construction equipment company. Your sister, who is the manager, has proposed an expansion of plant facilities at an expected cost of 26,000,000. Two alternative plans have been suggested as methods of financing the expansion. Each plan is briefly described as follows: Plan 1.Issue 26,000,000 of 20-year, 8% notes at face amount Plan 2.Issue an additional 550,000 shares of 10 par common stock at 20 per share, and 15,000,000 of 20-year, 8% notes at face amount The balance sheet as of the end of the previous fiscal year is as follows: Net income has remained relatively constant over the past several years. The expansion program is expected to increase yearly income before bond interest and income tax from 2,667,000 in the previous year to 5,000,000 for this year. Your sister has asked you, as the company treasurer, to prepare an analysis of each financing plan. 1. Prepare a table indicating the expected earnings per share on the common stock under each plan. Assume an income tax rate of 40%. Round to the nearest cent. 2. a. Discuss the factors that should be considered in evaluating the two plans. b. Which plan offers greater benefit to the present stockholders? Give reasons for your opinion.
Issuing stock Epstein Engineering Inc. began operations on January 5, 20Y8, with the issuance of 500,000shares of 80 par common stock. The sole stockholders of Epstein Engineering Inc. are Barb Abrams and Dr. Amber Epstein, who organized Epstein Engineering Inc. with the objective of developing a new flu vaccine. Dr. Epstein claims that the flu vaccine, which is nearing the final development stage, will protect individuals against 90% of the flu types that have been medically identified. To complete the project, Epstein Engineering Inc. needs 25,000,000 of additional funds. The local banks have been unwilling to loan the funds because of the lack of sufficient collateral and the riskiness of the business. The following is a conversation between Barb Abrams, the chief executive officer of Epstein Engineering Inc., and Amber Epstein, the leading researcher: Barb: What are we going to do? The banks wont loan us any more money, and weve got to have 25 million to complete the project. We are so close! It would be a disaster to quit now. The only thing I can think of is to issue additional stock. Do you have any suggestions? Amber: I guess youre right. But if the banks wont loan us any more money, how can we find any investors to buy stock? Barb: Ive been thinking about that. What if we promise the investors that we will pay them 5% of sales until they receive an amount equal to what they paid for the stock? Amber: What happens when we pay back the 25 million? Do the investors get to keep the stock? If they do, itll dilute our ownership. Barb: How about if after we pay back the 25 million, we make them turn in their stock for 120 per share? Thats one and one-half times what they paid for it, and they would have already gotten all their money back. Thats a 120 profit per share for the investors. Amber: It could work. We get our money but dont have to pay any interest, dividends, or the 80 per share until we start generating sales. At the same time, the investors could get their money back plus 120 per share profit. Barb: Well need current financial statements for the new investors. Ill get our accountant working on them and contact our attorney to draw up a legally binding contract for the new investors. Yes, this could work. In late 20Y8, the attorney and the various regulatory authorities approved the new stock offering, and 312,500 shares of common stock were privately sold to new investors at the stocks par of 80. In preparing financial statements for 20Y8, Barb Abrams and Dan Fisher, the controller for Epstein Engineering Inc., have the following conversation: Dan: Barb, Ive got a problem. Barb: Whats that, Dan? Dan: Issuing common stock to raise that additional 25 million was a great idea. But . . . Barb: But what? Dan: Ive got to prepare the 20Y8 annual financial statements, and I am not sure how to classify the common stock. Barb: What do you mean? Its common stock. Dan: Im not so sure. I called the auditor and explained how we are contractually obligated to pay the new stockholders5% of sales until 80 per share is paid. Then we may be obligated to pay them 120 per share. Barb: So . . . Dan: So the auditor thinks that we should classify the additional issuance of 25 million as debt, not stock! And if we put the 25 million on the balance sheet as debt, we will violate our other loan agreements with the banks. And if these agreements are violated, the banks may call in all our debt immediately. If they do that, we are in deep trouble. Well probably have to file for bankruptcy. We just dont have the cash to pay off the banks. 1. Discuss the arguments for and against classifying the issuance of the 25 million of stock as debt. 2. What might be a practical solution to this classification problem?
Restricted Share Units On January 2, 2019, Dekker Company grants each of its 15 new employees 200 restricted share units. Each of the time-vested restricted share units entitles the employee to receive one share of Dekker common stock if they remain an employee of the company for 2 years. On January 2, 2019, shares of Dekkers 2 par value common are trading at 52 per share. Dekker estimates that 12 of the 15 employees will complete 2 years of service with the company. At the end of 2020, Dekker reported that four employees left the company before completing the service period. Required: 1. Prepare a schedule of Dekker s computations for its restricted share unit plan for 2019 and 2020 (round all computations to the nearest dollar). 2. Prepare all journal entries for the restricted share unit plan for 2019 and 2020.
On January 1, 2019, Phoenix Corporation adopts a performance-based share option plan for 25 executives, with the number of shares based on the yearly increase in sales. At the end of 2019, based on a 10% increase in sales, it expects that each executive will be granted 150 options and that the fair value of an option expected to vest is 15.75. Phoenix expects a turnover rate of 15% over the 3-year service period. Determine the compensation expense for 2019 for this plan.
Subscriptions On August 3, 2019, the date of incorporation, Quinn Company accepts separate subscriptions for 1,000 shares of 100 par preferred stock at 104 per share and 9,000 shares of 110-par, no-stated-value common stock for 22 per sl1are. The subscription contracts require a 10% down payment, with the balance due by November 1, 2019. Shares are issued to each subscriber upon full payment. On November 1, Quinn received the remaining balances for the shares of preferred stock and common stock. Required: Prepare journal entries to record all the transactions related to: 1. the preferred stock 2. the common stock
PROBLEM 5 At the beginning of Year 1, an entity grants 15,000 share options with a ten-year life to each of ten senior executives. The share options will vest and become exercisable immediately if and when the entity’s share price increases from P50 to P70, provided that the executives remains in service until the share price target is achieved.The entity applies a binomial option pricing model, which takes into account the possibility that the target will be achieved during the ten-year life of the options and the possibility that the target will not be achieved. The entity estimates that the fair value of the share options at grant date is P25 per option. From the option pricing model, the entity determines that the mode of the distribution of possible vesting date is five years. In other words, of all the possible outcomes, the most likely outcome of the market condition is that the share price target will be achieved at the end of Year 5. Therefore, the entity estimates that the…
Knowledge Check 01 At January 1, Year 1, AMC Company grants 10,000 options that permit key executives to acquire 10,000 of the company’s $1 par common shares within the next five years, but not before December 31, Year 3 (the vesting date). The exercise price is the market price of the shares on the date of grant, $20 per share. The fair value of the options is $4 per option. Eighty percent of the options (or 8,000) are exercised on January 5, Year 4 when the market price is $30 per share. The remaining 20% of the options expire as unexercised when the market price is $18 per share. Prepare the appropriate journal entry for the expiration of the unexercised options.
Show the complete solution On January 1,20x1, Mimosa Company grants 10,000 with a 10-year life to each of the 12 senior executives. The share options will vest and become exercisable if and when the entity’s share price increases from P50 to P70, provided that the executive remains in service until the share price target is achieved. Mimosa applies the binomial option pricing model, which considers the possibility that the share target will be achieved during the ten-year life of the options, and the possibility that the target will not be achieved. Mimosa estimates that the fair value of the share options at grant date is P27 per option. From the option pricing model, Mimosa determines that the mode of the distribution of possible vesting dates is five (5) years. In other words, of all the possible outcomes, the most likely outcome of the market condition is that the share price target will be achieved at the end of 20x5. Therefore, Mimosa estimates that the expected vesting period is…
PROBLEM 3 : At the beginning of Year 1, an entity grants 1,000 share options to 50 employees. The share options will vest at the end of Year 3, provided the employees remain in service until then. The share options have a life of 10 years. The exercise price is 60 and the entity’s share price is also P60 at the end of the grant. The entity’s share price have a par value of P20.At the date of grant, the entity concludes that it cannot estimate reliably the fair value of the share options granted. At the end of Year 1, three employees have ceased employment and the entity estimates that a further seven employees will leave during Years 2 and 3. Hence, the entity estimates that 80% of the share options will vest. Two employees leave during Year 2, and the entity revises its estimate of the number of share options that it expects will vest to 86%. Two employees leave during year 3. Hence, 43,000 share options vested at the end of year 3.The entity’s share price during Years 1 to 10, and…
PROBLEM 3 : At the beginning of Year 1, an entity grants 1,000 share options to 50 employees. The share options will vest at the end of Year 3, provided the employees remain in service until then. The share options have a life of 10 years. The exercise price is 60 and the entity’s share price is also P60 at the end of the grant. The entity’s share price have a par value of P20.At the date of grant, the entity concludes that it cannot estimate reliably the fair value of the share options granted. At the end of Year 1, three employees have ceased employment and the entity estimates that a further seven employees will leave during Years 2 and 3. Hence, the entity estimates that 80% of the share options will vest. Two employees leave during Year 2, and the entity revises its estimate of the number of share options that it expects will vest to 86%. Two employees leave during year 3. Hence, 43,000 share options vested at the end of year 3.The entity’s share price during Years 1 to 10, and…
2. ABC Corporation (a public company) establishes an employee stock option plan on January 1, year 1. The plan allows its employees to acquire 10,000 shares of its P1 par value common stock at P52 per share, when the market price is also P52. The options may not be exercised until five years from the grant date. The grant-date fair value of an option with similar terms and conditions is P8.62. Compensation expense at the end of year 1 is Answer:
Problem 1 (Adapted)On January 1, 2017, Gliezel company issued options to key employees to purchase 20,000 ordinary shares of P100 par value at P125 per share. On such date, the market value of ordinary share is P150 per share. The fair value of each share option is P30. These options are exercisable starting January 1, 2019 and expire one year after. Options covering 17,500 shares are exercised on January 15, 2019 and the remaining options expired. a. Compute compensation expense for the year 2017, 2018 and 2019.b. Prepare journal entries to record the compensation each year as well as the exercise and expiration of the share options