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.
Want to see more full solutions like this?
Chapter 19 Solutions
GEN CMB(LL)INTRM ACCTG
- Problem 15-10 (AICPA Adapted) During 2021, Haggard Company purchased marketable equity securities for P1,850,000 to be held as trading investments, In 2021, the entity appropriately reported an unrealized gain of P250,000 in the income statement. There was no change during 2021 in the composition of the portfolio of trading securities. Pertinent data on December 31, 2022 are: Security Cost Market value 600,000 450,000 800,000 900,000 400,000 1,200,000 What amount of unrealized gain on these securities should be included in the 2022 income statement? a. 400,000 b. 650,000 c. 900,000 d. 700,000 ABCarrow_forwardhas equity securities designated as at fair value Hilton, Inc. through profit or loss that were purchased during 2020. At the end of 2020, the securities had total fair value of P525,000. As of December 31, 2021, the cost and fair values are as follows: Cost P100,000 190,000 250,000 Fair Value P 90,000 210,000 235,000 Investment 1 2 The gain or loss that would be reported in profit or loss as a result of the valuation of the securities at the end of 2021 is P 5,000 P10,000 P20,000 P25,000 а. b. c. d.arrow_forwardQuestion 7 During 2020, Crane Company purchased 91000 shares of Novak Corporation common stock for $1370000 as an equity investment. The fair value of these shares was $1299000 at December 31, 2020. Crane sold all of the Novak stock for $16 per share on December 3, 2021, incurring $67000 in brokerage commissions. Crane Company should report a realized gain on the sale of stock in 2021 of $86000. $19000. $157000. $90000.arrow_forward
- As part of its stock-based compensation package, International Electronics granted 61 million stock appreciation rights (SARs) to top officers on January 1, 2024. • At exercise, holders of the SARS are entitled to receive cash or stock equal in value to the excess of the market price at exercise over the share price at the date of grant. • The SARS cannot be exercised until the end of 2027 (vesting date) and expire at the end of 2029. • The $1 par common shares have a market price of $65 per share on the grant date. • The fair value of the SARS, estimated by an appropriate option pricing model, is $5.00 per SAR at January 1, 2024. • The fair value re-estimated at December 31, 2024, 2025, 2026, 2027, and 2028, is $6.00, $5.00, $6, $2.00, and $5.00, respectively. • All recipients are expected to remain employed through the vesting date. Required: .to 3. Prepare the appropriate journal entries pertaining to the SARS on January 1, 2024 and December 31, 2024-December 31, 2027. The SARS…arrow_forward39. D On January 1, 2019, Caraga Company purchased equity securities to be held as financial assets measured at fair value through other comprehensive income. Market – 12/31/19 3,200,000 3,500,000 4,600,000 Market 12/31/2020 Security R Security S Security T Cost 3,000,000 4,000,000 5,000,000 3,700,000 4,700,000 On January 31, 2020, the entity sold Security R for P3,500,000. What amount should be recognized directly in retained earnings of as a result of the sale of investment in 2020? a. 500,000 b. 300,000 c. 200,000 d. 0arrow_forwardQuestion 46 During 2021, Stout Inc. had the following activities related to its financial operations: Carrying value of convertible preferred stock in Stout, converted into common shares of Stout $ 540,000 Payment in 2021 of cash dividend declared in 2020 to preferred shareholders 279,000 Payment for the early retirement of long-term bonds payable (carrying amount $3,930,000) 3,975,000 Proceeds from the sale of treasury stock (on books at cost of $387,000) 450,000 The amount of net cash used in financing activities to appear in Stout's statement of cash flows for 2021 should be $3,264,000. $2,985,000. $3,822,000. $3,804,000.arrow_forward
- Recording Entries for Restricted Stock Unit Plan with Estimated Forfeitures On December 31, 2020, 5M Inc. approved a restricted stock unit plan to be awarded to executives. The plan included the following general terms. Each restricted stock unit is equivalent to one share of $1 par value, common stock of 5M Inc. Restricted stock units vest three years after the date of grant, subject to forfeiture if employment is terminated prior to the end of the vesting period. Shares are distributed after the vesting period if the employee is still employed by the company. On December 31, 2020, 90,000 restricted stock units were granted to key employees under this plan when the market price of the common stock was $25 per share. The company estimates that 15% of the restricted stock units will be forfeited and it is the company's policy to estimate forfeitures. Required a. Compute the total amount of compensation cost for the restricted stock unit plan. $Answer b. Prepare the…arrow_forwardRecording Entries for Restricted Stock Unit Plan with Estimated Forfeitures On December 31, 2020, 5M Inc. approved a restricted stock unit plan to be awarded to executives. The plan included the following general terms. Each restricted stock unit is equivalent to one share of $1 par value, common stock of 5M Inc. Restricted stock units vest three years after the date of grant, subject to forfeiture if employment is terminated prior to the end of the vesting period. Shares are distributed after the vesting period if the employee is still employed by the company. On December 31, 2020, 36,000 restricted stock units were granted to key employees under this plan when the market price of the common stock was $25 per share. The company estimates that 15% of the restricted stock units will be forfeited and it is the company's policy to estimate forfeitures. Required a. Compute the total amount of compensation cost for the restricted stock unit plan. $Answer b. Prepare the journal…arrow_forwardRecording Entries for Restricted Stock Unit Plan with Estimated Forfeitures On December 31, 2020, 5M Inc. approved a restricted stock unit plan to be awarded to executives. The plan included the following general terms. Each restricted stock unit is equivalent to one share of $1 par value, common stock of 5M Inc. Restricted stock units vest three years after the date of grant, subject to forfeiture if employment is terminated prior to the end of the vesting period. Shares are distributed after the vesting period if the employee is still employed by the company. On December 31, 2020, 90,000 restricted stock units were granted to key employees under this plan when the market price of the common stock was $25 per share. The company estimates that 15% of the restricted stock units will be forfeited and it is the company's policy to estimate forfeitures. d. Prepare the journal entry on December 31, 2022. At that time, the company adjusts its estimate of forfeitures to 10%. e.…arrow_forward
- HARDWORK Corporation purchased 10,000 shares of its P10 par value ordinary shares for P120,000 on March 2, 2019. On December 18, 2019, HARDWORK reissued all 10,000 shares for P190,000. The issuance of treasury shares would include a credit to: * Retained earnings of P70,000 Share premium of P70,000 Gain on sale of investment of P70,000 Share capital of P100,000 None of the choicesarrow_forwardProblem 15-14 (AICPA Adapted) On January 1, 2020, Jerome Company purchased nontrading equity investments which are irrevocably designated at FVOČI: Market value December 31, 2020 Transaction Purchase price cost Security A Security B Security C 1,000,000 2,000,000 4,000,000 100,000 200,000 400,000 1,500,000 2,400,000 4,700,000 On July 1, 2021, the entity sold Security C for P5,200,000. What amount of gain on sale should be recognized in the income statement for 2021? 800,000 b. 500,000 300,000 d. а. C.arrow_forwardAs part of its stock-based compensation package, on January 1, 2016, 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 2019 (vesting date) and expire at the end of 2021. The $1 par common shares have a market price of $6 per share on the grant date. The fair value at December 31, 2016, 2017, 2018, 2019, and 2020, is $8, $6, $8, $5, and $6, respectively. All recipients are expected to remain employed through the vesting date. Required: 1. Prepare the appropriate journal entry to record the award of RSUs on January 1, 2016. 2. Prepare the appropriate journal entries pertaining to the RSUs on December 31, 2016–December 31, 2019. 3. The RSUs remain unexercised on December 31, 2020. Prepare the appropriate journal entry on that date. 4. The RSUs are…arrow_forward
- Cornerstones of Financial AccountingAccountingISBN:9781337690881Author:Jay Rich, Jeff JonesPublisher:Cengage LearningIntermediate Accounting: Reporting And AnalysisAccountingISBN:9781337788281Author:James M. Wahlen, Jefferson P. Jones, Donald PagachPublisher:Cengage Learning