
Concept explainers
(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
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, 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 | 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 2018.
Prepare journal entry for compensation expense on December 31, 2019.
Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) | |
2019 | |||||
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 2019.
Note: Refer to Equation (1) for value and computation of compensation expense in 2018.
Prepare journal entry for compensation expense on December 31, 2020.
Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) | |
2020 | |||||
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 2020.
Note: Refer to Equations (1) and (2) for value and computation of compensation expense in 2018 and 2019.
Prepare journal entry for compensation expense on December 31, 2021.
Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) | |
2021 | |||||
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, andthe account is credited.
Working Notes:
Compute compensation expense for 2021.
Note: Refer to Equations (1), (2) and (3) for value and computation of compensation expense in 2018, 2019, and 2020.
(3)
To prepare: Journal entry for the unexercised SARs as on December 31, 2022
(3)

Explanation of Solution
Prepare journal entry to record unexercised SARs as on December 31, 2022.
Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) | |
2022 | |||||
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, 2022.
Note: Refer to Equations (1), (2), (3), and (4) for value and computation of compensation expense in 2018, 2019, 2020 and 2021.
(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 | 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 2023.
Note: Refer to Equations (1), (2), (3), (4), and (5) for value and computation of compensation expense in 2018, 2019, 2020, 2021 and 2022.
Journalize the payment of SARs, which was a liability, as cash.
Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) | |
2023 | |||||
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
- How much is the direct materials price variance for this accounting question?arrow_forwardMiguel Manufacturing Company uses a predetermined manufacturing overhead rate based on direct labor hours. At the beginning of 2023, they estimated total manufacturing overhead costs at $2,352,000, and they estimated total direct labor hours at 7,000. The administration and selling overheads are to be absorbed in each job cost at 15% of prime cost. Distribution cost should be added to each job according to quotes from outside carriage companies. The company wishes to quote for job # 222. Job stats are as follows: Direct materials cost Direct labour cost $173,250 $240,000 500 hours Direct labour hours Special Design Cost Distribution quote from haulage company Units of product produced $8,750 $21,700 400 cartons a) Compute Miguel's Manufacturing Company predetermined manufacturing overhead rate for 2023. b) How much manufacturing overhead was allocated to Job #222? c) Calculate the total cost & quotation price of Job #222, given that a margin of 25% is applied. d) How much was the…arrow_forwardFaced with rising pressure for a $17 per hour minimum wage rate, the farming industry is currently exploring the possible use of robotics to replace some farm workers. The Produce Bot is one such robot; its job is to thin out a field of lettuce, removing the least promising buds of lettuce. By removing these weaker plants, the stronger lettuce plants have more room to grow. Assume the following facts: i (Click the icon to view the information.) While the Produce Bot itself may be in workable condition for up to five years, assume that the farm would view its implementation as a one-year experiment. Requirement Perform a cost-benefit analysis for the first year of implementation to determine whether the Produce Bot would be a financially viable investment if the minimum wage is raised to $17 per hour. (Round your answers to the „bola dallon\ Cost-Benefit Analysis Expected Benefits (Cost Savings): Total expected benefits Expected Costs: Total expected costs Net expected benefit (cost)…arrow_forward
- PROBLEM 2 On July 1, 2022, LTU Contracting, Inc. purchased a new Peiner SK575 Tower Crane for a total cost of $875,000. The crane has an estimated useful life of five (5) years. For financial reporting (book) purposes, the company utilizes straight line depreciation. For tax purposes, the equipment is depreciated over five years utilizing the 200% declining balance method. A. Prepare a table that computes the book and tax depreciation for each year of the useful life and determine the difference in book value between each method at the end of each year. B. On July 1st, 2025, the company is considering selling the crane for $500,000. Compute what the gain or loss would have been at that time for both book and tax purposes.arrow_forwardPLEASE HELP AND FILL ALL CELLSarrow_forwardhi expert please help mearrow_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





