INTERMEDIATE ACCOUNTING
INTERMEDIATE ACCOUNTING
8th Edition
ISBN: 9780078025839
Author: J. David Spiceland
Publisher: McGraw-Hill Education
Question
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Chapter 19, Problem 19.28E

(1)

To determine

Stock appreciation rights (SARs): Stock appreciation rights are the compensation plans provided in the form of rights to receive cash or shares for the appreciated value (difference between the market price of shares on the exercise date and the market price of shares on the grant date). The choice between the cash or shares would be chosen either by employers or employees.

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 SARs on January 1, 2016, and mention whether SARs would be reported as debt or equity

(1)

Expert Solution
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Explanation of Solution

If the employee chooses to issue cash or shares, the SARs 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 SARs are considered as liability, those should be adjusted each year, to reflect the fair value, until the SARS 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 determine

To journalize: The entries related to SARs from December 31, 2016 to December 31, 2019

(2)

Expert Solution
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Explanation of Solution

Prepare journal entry for compensation expense on December 31, 2016.

Date Account Titles and Explanation Post Ref. Debit ($) Credit ($)
2016        
December 31 Compensation Expense   24,000,000
          Liability–SAR Plan   24,000,000
(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–SAR Plan 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 2016.

Compensation expense} = {Fair value as on December 31, 2016 × Number of SARs granted × Number of years completed in vesting periodVesting period}= $4×24,000,000 SARs×1 year4 years=$24,000,000 (1)

Prepare journal entry for compensation expense on December 31, 2017.

Date Account Titles and Explanation Post Ref. Debit ($) Credit ($)
2017        
December 31 Compensation Expense   12,000,000
          Liability–SAR Plan   12,000,000
(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–SAR Plan 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 2017.

Compensation expense} = {(Fair value as on December 31, 2017 × Number of SARs granted × Number of years completed in vesting periodVesting period)Compensation expense in 2016}($3×24,000,000 SARs×2 years4 years)$24,000,000=$12,000,000 (2)

Note: Refer to Equation (1) for value and computation of compensation expense in 2016.

Prepare journal entry for compensation expense on December 31, 2018.

Date Account Titles and Explanation Post Ref. Debit ($) Credit ($)
2018        
December 31 Compensation Expense   36,000,000
          Liability–SAR Plan   36,000,000
(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–SAR Plan 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.

Compensation expense} =[{Fair value as on December 31, 2018 × Number of SARs granted × Number of years completed in vesting periodVesting period}Compensation expense in 2016–Compensation expense in 2017]={($4×24,000,000 SARs×3 years4 years)$24,000,000–$12,000,000}=$36,000,000 (3)

Note: Refer to Equations (1) and (2) for value and computation of compensation expense in 2016 and 2017.

Prepare journal entry for compensation expense on December 31, 2019.

Date Account Titles and Explanation Post Ref. Debit ($) Credit ($)
2019        
December 31 Liability–SAR Plan   12,000,000
             Compensation Expense   12,000,000
(To record compensation expense)

Table (4)

  • Liability–SAR Plan 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, and the account is credited.

Working Notes:

Compute compensation expense for 2019.

Compensation expense} =[{Fair value as on December 31, 2019 × Number of SARs granted × Number of years completed in vesting periodVesting period}Compensation expense in 2016–Compensation expense in 2017Compensation expense in 2018]={($2.50×24,000,000 SARs×4 years4 years)$24,000,000–$12,000,000–$36,000,000}=$(12,000,000) (4)

Note: Refer to Equations (1), (2) and (3) for value and computation of compensation expense in 2016, 2017, and 2018.

(3)

To determine

To prepare: Journal entry for the unexercised SARs as on December 31, 2020

(3)

Expert Solution
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Explanation of Solution

Prepare journal entry to record unexercised SARs as on December 31, 2020.

Date Account Titles and Explanation Post Ref. Debit ($) Credit ($)
2020        
December 31 Compensation Expense   12,000,000
           Liability–SAR Plan 12,000,000
(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–SAR Plan is a liability account. Since SARs are unexercised by the employees, liability is adjusted, and liability is credited.

Working Notes:

Compute the amount of liability as at December 31, 2020.

Compensation expense} =[{Fair value as on December 31, 2020 × Number of SARs granted × all}Compensation expense in 2016–Compensation expense in 2017–Compensation expense in 2018+Compensation expense in 2019]={($3 × 24,000,000 SARs × all)$24,000,000–$12,000,000–$36,000,000+$12,000,000}=$12,000,000 (5)

Note: Refer to Equations (1), (2), (3), and (4) for value and computation of compensation expense in 2016, 2017, 2018 and 2019.

(4)

To determine

To journalize: The entry for SARs exercised on June 6, 2021

(4)

Expert Solution
Check Mark

Explanation of Solution

Journalize the entry for options exercised.

Date Account Titles and Explanation Post Ref. Debit ($) Credit ($)
2021        
June 6 Compensation Expense   24,000,000
           Liability–SAR Plan   24,000,000
(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–SAR Plan is a liability account. Since SARs are unexercised by the employees, liability is adjusted, and liability is credited.

Working Notes:

Compute the amount of liability as at June 6, 2021.

Compensation expense} =[{(Market price on exercise date– Market price on grant date) ×Number of SARs granted × all}Compensation expense in 2016–Compensation expense in 2017–Compensation expense in 2018+Compensation expense in 2019–Compensation expense in 2020]={(($50–$46) × 24,000,000 SARs × all)$24,000,000–$12,000,000–$36,000,000+$12,000,000–$12,000,000}=$24,000,000

Note: Refer to Equations (1), (2), (3), (4), and (5) for value and computation of compensation expense in 2016, 2017, 2018, 2019 and 2020.

Journalize the payment of SARs, which was a liability, as cash.

Date Account Titles and Explanation Post Ref. Debit ($) Credit ($)
2021        
June 6 Liability–SAR Plan   96,000,000
            Cash 96,000,000
(To record payment of liability of SARs)

Table (7)

  • Liability–SAR Plan is a liability account. Since SARs are exercised, liability is decreased, and a decrease in liability is debited.
  • Cash is an asset account. Since SARs 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 SARs granted.

Cash to be paid for SARs} = {(Market price on exercise date – Market price on grant date) × Number of SARs granted}($50–$46)×24,000,000 SARs= $96,000,000

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INTERMEDIATE ACCOUNTING

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