
(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, 2018, and mention whether SARs would be reported as debt or equity
(1)

Explanation of Solution
The SARs would be reported as equity by Company IE because the SARs are entitled to be settled as stock on the exercise date. 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, 2018 to December 31, 2021
(2)

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 | 18,000,000 | ||
Paid-In Capital–SAR Plan | 18,000,000 | ||||
(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.
- Paid-in Capital–SAR Plan is a stockholders’ equity account. Since shares are considered as earned by the employee, stockholders’ equity increased, and an increase in equity is credited.
Working Notes:
Compute the total compensation cost of SARs.
Compute the compensation expense allocated each year.
Note: Refer to Equation (1) for the value and computation of compensation cost.
Prepare journal entry for compensation expense on December 31, 2019.
Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) | |
2019 | |||||
December | 31 | Compensation Expense | 18,000,000 | ||
Paid-In Capital–SAR Plan | 18,000,000 | ||||
(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.
- Paid-in Capital–SAR Plan is a stockholders’ equity account. Since shares are considered as earned by the employee, stockholders’ equity increased, and an increase in equity is credited.
Note: Refer to Equation (2) for value and computation of compensation expense.
Prepare journal entry for compensation expense on December 31, 2020.
Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) | |
2020 | |||||
December | 31 | Compensation Expense | 18,000,000 | ||
Paid-In Capital–SAR Plan | 18,000,000 | ||||
(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.
- Paid-in Capital–SAR Plan is a stockholders’ equity account. Since shares are considered as earned by the employee, stockholders’ equity increased, and an increase in equity is credited.
Note: Refer to Equation (2) for value and computation of compensation expense.
Prepare journal entry for compensation expense on December 31, 2021.
Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) | |
2021 | |||||
December | 31 | Compensation Expense | 18,000,000 | ||
Paid-In Capital–SAR Plan | 18,000,000 | ||||
(To record compensation expense) |
Table (4)
- Compensation Expense is an expense account. Since expenses decrease stockholders’ equity, and a decrease in stockholders’ equity is debited.
- Paid-in Capital–SAR Plan is a stockholders’ equity account. Since shares are considered as earned by the employee, stockholders’ equity increased, and an increase in equity is credited.
Note: Refer to Equation (2) for value and computation of compensation expense.
(3)
To prepare: Journal entry for the unexercised SARs as on December 31, 2022.
(3)

Explanation of Solution
The compensation cost is expensed till December 31, 2021, and would be measured only once. The expense would not be re-measured on December 31, 2022. So do not record any entry for this transaction on December 31, 2022.
(4)
To journalize: The entry for SARs exercised on June 6, 2023
(4)

Explanation of Solution
Journalize the entry for options exercised.
Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) | |
2023 | |||||
June | 6 | Paid-in Capital – SAR Plan | 72,000,000 | ||
Common Stock | 1,920,000 | ||||
Paid-in Capital–Excess of Par | 70,080,000 | ||||
(To record SARsexercised by employees) |
Table (5)
- Paid-in Capital–SAR Plan is a stockholders’ equity account. Since stock options are exercised and shares are issued, stock options value is decreased, and a decrease in equity is debited.
- Common Stock is a stockholders’ equity account. Since stock options are exercised and shares are issued, common stock value increased, and an increase in equity is credited.
- Paid-in Capital–Excess of Par is a stockholders’ equity account. Since stock options are exercised and shares are issued, excess of par value increased, and an increase in equity is credited.
Working Notes:
Compute the paid-in capital amount.
Compute number of shares for SARs granted.
Compute number of shares to be received by employees for the market price on exercise date.
Note: Refer to Equation (4) for the value and computation of number of shares for SARs.
Compute the common stock amount.
Note: Refer to Equation (5) for the value and computation of number of shares received by employees.
Compute the paid-in capital–excess of par amount.
Note: Refer to Equations (3) and (6) for both the values.
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Chapter 19 Solutions
INTERMEDIATE ACCOUNTING (LL) W/CONNECT
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