
(1)
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.
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)

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 journalize: The entries related to SARs from December 31, 2016 to December 31, 2019
(2)

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.
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.
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.
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.
Note: Refer to Equations (1), (2) and (3) for value and computation of compensation expense in 2016, 2017, and 2018.
(3)
To prepare: Journal entry for the unexercised SARs as on December 31, 2020
(3)

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.
Note: Refer to Equations (1), (2), (3), and (4) for value and computation of compensation expense in 2016, 2017, 2018 and 2019.
(4)
To journalize: The entry for SARs exercised on June 6, 2021
(4)

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.
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.
Want to see more full solutions like this?
Chapter 19 Solutions
INTERMEDIATE ACCOUNTING
- 1. Define working capital and explain its importance in financial health and liquidity management. 2. Assess how the matching concept and accrual basis affect the reporting of current assets and liabilities. 3. Using a hypothetical balance sheet (you may create one), identify at least 5 current assets and 5 current liabilities and analyze how changes in these elements affect liquidity ratios. 4. Recommend at least two strategies VinGrenDom Ltd. can implement to optimize working capital.arrow_forwardNonearrow_forwardNo Ai Answerarrow_forward
- I need the correct answer to this financial accounting problem using the standard accounting approach.arrow_forwardTheron Interiors manufactures handcrafted cabinetry and uses a process costing system. During the month of October, the company started Production on 720 units and completed 590 units. The remaining 120 units were 60% complete in terms of materials and 40% complete in terms of labor and overhead. The total cost incurred during the month was $45,000 for materials and $31,200 for labor and overhead. Using the weighted-average method, what is the equivalent unit cost for materials and conversion costs (labor and overhead)?arrow_forwardGeneral Accountingarrow_forward
- Kamala Khan has to decide between the following two options: Take out a student loan of $70,000 and study accounting full time for the next three years. The interest on the loan is 4% per year payable annually. The principle is to be paid in full after ten years. Study part time and work part time to earn $15,000 per year for the following six years. Once Kamala graduates, she estimates that she will earn $30,000 for the first three years and $40,000 the next four years. Kamala's banker says the market interest for a ten-year horizon is 6%. Required Calculate NPV of the ten-year cash flows of the two options. For simplification assume that all cash flows happen at year-end. Based on the NPV which of the two options is better for Kamala?arrow_forwardFinancial Accountingarrow_forwardPlease give me answer with general accountingarrow_forward
- AccountingAccountingISBN:9781337272094Author:WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.Publisher:Cengage Learning,Accounting Information SystemsAccountingISBN:9781337619202Author:Hall, James A.Publisher:Cengage Learning,
- Horngren's Cost Accounting: A Managerial Emphasis...AccountingISBN:9780134475585Author:Srikant M. Datar, Madhav V. RajanPublisher:PEARSONIntermediate AccountingAccountingISBN:9781259722660Author:J. David Spiceland, Mark W. Nelson, Wayne M ThomasPublisher:McGraw-Hill EducationFinancial and Managerial AccountingAccountingISBN:9781259726705Author:John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting PrinciplesPublisher:McGraw-Hill Education





