On January 1, 2019, Rhine Company adopts a performance-based share option plan for its 80 key executives. Each executive is granted a maximum of 70 share options, but the number of options that vest depends on the percentage increase in Rhine’s sales over a 3-year service period. If by December 31, 2021, sales have increased by at least 10%, 50 options will vest for each executive; if sales have increased by at least 15%, all 70 options will vest. On the grant date, Rhine estimates that its sales will increase by 12% over the service period, and that its employee turnover rate over the 3-year service period will be 6%. It also determines that the fair value of an option expected to vest is $13.40. At the end of 2021, actual sales had increased by 16% for the service period, and the actual turnover was 6 key executives for the service period. 1) How do you prepare a schedule of Rhine’s computations for its compensatory share option plan for 2019 through 2021? 2) Prepare the compensation expense journal entry for 2019.
On January 1, 2019, Rhine Company adopts a performance-based share option plan for its 80 key executives. Each executive is granted a maximum of 70 share options, but the number of options that vest depends on the percentage increase in Rhine’s sales over a 3-year service period. If by December 31, 2021, sales have increased by at least 10%, 50 options will vest for each executive; if sales have increased by at least 15%, all 70 options will vest. On the grant date, Rhine estimates that its sales will increase by 12% over the service period, and that its employee turnover rate over the 3-year service period will be 6%. It also determines that the fair value of an option expected to vest is $13.40. At the end of 2021, actual sales had increased by 16% for the service period, and the actual turnover was 6 key executives for the service period.
1) How do you prepare a schedule of Rhine’s computations for its compensatory share option plan for 2019 through 2021?
2) Prepare the compensation expense
ANSWER:-
1.
The compensation expense per year for 2019 and 2020 will consider only 50 options per executive because the expected increase in sales is 12% i.e., more than 10% but less than 15%.
The compensation expense per year for 2021 will consider all the 70 options per executive because the actual increase in the sales is 16% i.e., more than 15%.
The total compensation expense (TCE) for 2019 and 2020 will be the same because the actual share options will be known only in 2021. The retention rate will be 6% and therefore the compensation costs will be computed at only 94%
Total Compensation Expense 2019 & 2020= Number of Executives x Number of Shares x Fair Value per share x (1-6%)
=80 x 50 x $ 13.4 x 94%
=$ 50, 384
The TCE for 2021 is computed by
considering the number of executives
after deducting the executives from
the total number of executives.
Total Compensation Expense 2021 =Number of Executives x Number of Shares x Fair Value Per Share
=(80-6) x 70 x $13.4
=$69, 412
Rhine Company Performance-based Compensatory Share Option Plan
| 2019 | 2020 | 2021 | |
| Estimated (actual) total compensation cost | $50,384.00 | $50,384.00 | $69,412.00 |
| Fraction of service period expired | x1/3 | X2/3 | X3/3 |
| Estimated compensation expense to date | $16,794.67 | $33,589.33 | $69,412.00 |
| Previously recognized compensation expense | 0 | (16,794.67) | (33,589.33) |
| Current compensation expense | $16,794.67 | $16,794.67 | $35,822.67 |
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