Intermediate Accounting: Reporting And Analysis
Intermediate Accounting: Reporting And Analysis
3rd Edition
ISBN: 9781337788281
Author: James M. Wahlen, Jefferson P. Jones, Donald Pagach
Publisher: Cengage Learning
Question
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Chapter 15, Problem 5P

1.

To determine

Prepare the schedule of Corporation P’s compensation calculations for its compensatory share option plan for 2019 to 2021.

1.

Expert Solution
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Explanation of Solution

Share option plan: This is an option given to an employee to buy a certain number of shares of stock of the company at a pre-determined price during certain period of time.

Performance-based share option compensation plan: This is a type of share option plan which could be exercised when the performance target mentioned is achieved by the employees.

Prepare the schedule of Corporation P’s compensation calculations for its compensatory share option plan for 2019 to 2021:

Particulars201920202021
Estimated (actual) total compensation cost$145,824 $149,296 $210,800
Fraction of service expired× 1/3 years×  2/3  years×  3/3 years
Estimated compensation expense to date48,60899,531210,800
Previously recognized compensation expense0(48,608)(99,531)
Current compensation expense$48,608$50,293$111,269

Table (1)

Working Note 1: Compute the total compensation cost of options for the year 2019:

Total compensation cost of options} = {Fair market value per share × Number of options expected to vest}{$15.50 × (140 options×80 executives)×(100%16%)retention rate}= $15.50 × 140 options×80 executives×84%= $145,824

Working Note 2: Compute the total compensation cost of options for the year 2020:

Total compensation cost of options} = {Fair market value per share × Number of options expected to vest}{$15.50 × (140 options×80 executives)×(100%14%)retention rate}= $15.50 × 140 options×80 executives×86%= $149,296

Working Note 3: Compute the total compensation cost of options for the year 2021:

Total compensation cost of options} = {Fair market value per share × Number of options actually vested}= $15.50 × (200 options×68 executives)= $210,800

2.

To determine

Prepare Corporation P’s memorandum entry for the grant date and journal entries for 2019 to 2022 related to this plan.

2.

Expert Solution
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Explanation of Solution

Prepare Corporation P’s memorandum entry for the grant date:

Memorandum entry: On January 1, 2019, the company granted performance-based compensatory share options to 80 executives. The plan allows each executive to exercise 200 options to acquire the same number of shares of company’s common stock at an exercise price of $45 per share and vest at the end of service period of 3 years. The estimated fair value of the options expected to be exercised is $145,824.

Prepare the journal entries for 2019 to 2022 related to the compensation plan:

DateAccounts title and ExplanationPost ref.Debit ($)Credit ($)
DecemberCompensation Expense  48,608 
 31, 2019    Paid-in Capital from Share Options   48,608
 (To record compensation expense for 2019)   

Table (2)

To record compensation expense for 2019:

  • Compensation Expense is an expense account. Expenses and losses decrease Equity account. Therefore, debit Compensation Expense account with $48,608.
  • Paid-in Capital from Share Options is a shareholders’ equity account. Since share options are granted, company’s stock amount has increased. Therefore, credit Paid-in Capital from Share Options account with $48,608.
DateAccounts title and ExplanationPost ref.Debit ($)Credit ($)
DecemberCompensation Expense  50,923 
 31, 2020    Paid-in Capital from Share Options   50,923
 (To record compensation expense for 2020)   

Table (3)

To record compensation expense for 2020:

  • Compensation Expense is an expense account. Expenses and losses decrease Equity account. Therefore, debit Compensation Expense account with $50,923.
  • Paid-in Capital from Share Options is a shareholders’ equity account. Since share options are granted, company’s stock amount has increased. Therefore, credit Paid-in Capital from Share Options account with $50,923.
DateAccounts title and ExplanationPost ref.Debit ($)Credit ($)
DecemberCompensation Expense  $111,269 
 31, 2021    Paid-in Capital from Share Options   $111,269
 (To record compensation expense for 2021)   

Table (4)

To record compensation expense for 2021:

  • Compensation Expense is an expense account. Expenses and losses decrease Equity account. Therefore, debit Compensation Expense account with $111,269.
  • Paid-in Capital from Share Options is a shareholders’ equity account. Since share options are granted, company’s stock amount has increased. Therefore, credit Paid-in Capital from Share Options account with $111,269.
DateAccounts title and ExplanationPost ref.Debit ($)Credit ($)

February

3, 2022

Cash (200×50×$45) 450,000 
Paid-in Capital From Share Options (200×50×$15.50) 155,000 
     Common Stock ($10×10,000)  100,000
     Additional Paid-in Capital on Common Stock  505,000
 (To record purchase options exercised by share option holders)   
     
December 31, 2022Paid-in Capital From Share Options (200×18×$15.50) $55,800 
    Additional Paid-in Capital on Common Stock  $55,800
 (To record the expired purchase options)   

Table (5)

To record purchase options exercised by share option holders:

  • Cash is an asset account. Since share options are exercised and shares are purchased for cash, cash is received. Therefore, debit Cash account with $450,000.
  • Paid-in Capital from Share Options is a shareholders’ equity account. Since share options which are granted are exercised, the entry is reversed and cancelled for options exercised. Therefore, debit Paid-in Capital from Share Options account with $155,000.
  • Common Stock is a shareholders’ equity account. Since share options which are granted are exercised and shares are sold, common stock amount increased. Therefore, credit Common Stock account with $100,000.
  • Additional Paid-in Capital on Common Stock is a shareholders’ equity account. Since share options which are granted are exercised and shares are sold for more than par value, additional capital amount increased. Therefore, credit Additional Paid-in Capital on Common Stock account with $505,000.

To record the expired purchase options:

  • Paid-in Capital from Share Options is a shareholders’ equity account. Since share options which are granted are expired, the entry is reversed and cancelled for options expired. Therefore, debit Paid-in Capital from Share Options account with $55,800.
  • Additional Paid-in Capital on Common Stock is a shareholders’ equity account. Since share options which were granted earlier, the shares were sold for more than par value, additional capital amount increased. Therefore, credit Additional Paid-in Capital on Common Stock account with $55,800.

3.

To determine

Prepare shareholders’ equity section that reporting the accounts related to compensation plan of Corporation P on December 31, 2020.

3.

Expert Solution
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Explanation of Solution

Prepare shareholders’ equity section that reporting the accounts related to compensation plan of Corporation P on December 31, 2020:

Corporation R
Shareholders' Equity (Partial)
December 31, 2020
Contributed capital 
    Paid-in capital from share options$99,531

Table (6)

4.

To determine

Identify whether there is a problem with the terms of Corporation P’s share option plan are structured and explain the same.

4.

Expert Solution
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Explanation of Solution

Identify whether there is a problem with the terms of Corporation P’s share option plan:

  • Company P granted performance based share option plan on the basis of increase in sales.
  • Company P shipped the inventory under ‘FOB destination’ terms, which means that sale of inventory is recorded when the inventory reaches the destination.
  • The problem was that Company P recorded the sales of inventory before the inventory reached the destination, resulting in increase of sales towards the end of 2021, when the options would be exercised.
  • Out of 68 options vested, 50 were exercised when the market price was $62, and 18 options expired due to decrease in market price. This resulted in increase of additional paid-in capital.

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