As part of its stock-based compensation package, International Electronics granted 24 million stock appreciation rights(SARs) to top officers on January 1, 2016. At exercise, holders of the SARs are entitled to receive stock equal in valueto the excess of the market price at exercise over the share price at the date of grant. The SARs cannot be exerciseduntil the end of 2019 (vesting date) and expire at the end of 2021. The $1 par common shares have a market price of$46 per share on the grant date. The fair value of the SARs, estimated by an appropriate option pricing model, is $3 perSAR at January 1, 2016. The fair value reestimated at December 31, 2016, 2017, 2018, 2019, and 2020, is $4, $3, $4,$2.50, and $3, respectively. All recipients are expected to remain employed through the vesting date.Required:1. Prepare the appropriate journal entry to record the award of SARs on January 1, 2016. Will the SARs bereported as debt or equity?2. Prepare the appropriate journal entries pertaining to the SARs on December 31, 2016–December 31, 2019.3. The SARs remain unexercised on December 31, 2020. Prepare the appropriate journal entry on that date.4. The SARs are exercised on June 6, 2021, when the share price is $50. Prepare the appropriate journal entry(s)on that date.
As part of its stock-based compensation package, International Electronics granted 24 million stock appreciation rights
(SARs) to top officers on January 1, 2016. At exercise, holders of the SARs are entitled to receive 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 2019 (vesting date) and expire at the end of 2021. The $1 par common shares have a market price of
$46 per share on the grant date. The fair value of the SARs, estimated by an appropriate option pricing model, is $3 per
SAR at January 1, 2016. The fair value reestimated at December 31, 2016, 2017, 2018, 2019, and 2020, is $4, $3, $4,
$2.50, and $3, respectively. All recipients are expected to remain employed through the vesting date.
Required:
1. Prepare the appropriate
reported as debt or equity?
2. Prepare the appropriate journal entries pertaining to the SARs on December 31, 2016–December 31, 2019.
3. The SARs remain unexercised on December 31, 2020. Prepare the appropriate journal entry on that date.
4. The SARs are exercised on June 6, 2021, when the share price is $50. Prepare the appropriate journal entry(s)
on that date.
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