Chapter 19, Problem 19.31E

Restricted stock units; cash settlement

• Appendix B

As part of its stock-based compensation package, on January 1, 2018, International Electronics granted restricted stock units (RSUs) representing 50 million $1 par common shares. At exercise, holders of the RSUs are entitled to receive cash or stock equal in value to the market price of those shares at exercise. The RSUs cannot be exercised until the end of 2021 (vesting date) and expire at the end of 2023. The $1 par common shares have a market price of $6 per share on the grant date. The fair value at December 31, 2018, 2019, 2020, 2021, and 2022, is $8, $6, $8, $5, and $6, respectively. All recipients are expected to remain employed through the vesting date. After the recipients of the RSUs satisfy the vesting requirement, the company will distribute the shares.

Required:

1. Prepare the appropriate journal entry to record the award of RSUs on January 1, 2018.

2. Prepare the appropriate journal entries pertaining to the RSUs on December 31, 2018–December 31, 2021.

3. The RSUs remain unexercised on December 31, 2022. Prepare the appropriate journal entry on that date.

4. The RSUs are exercised on June 6, 2023, when the share price is $6.50, and executives choose to receive cash. Prepare the appropriate journal entry(s) on that date.

To determine

Restricted stock units (RSUs): RSU is a right of the employee to receive a certain number of shares of stock of the company as a performance incentive, or usual compensation, or signing bonus.

Journal entry: Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.

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 RSUs on January 1, 2018

Explanation of Solution

If the employee chooses to issue cash or shares, the RSUs 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 RSUs are considered as liability, those should be adjusted each year, to reflect the fair value, until the RSUS 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.

To determine

To journalize: The entries related to RSUs from December 31, 2018 to December 31, 2021

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		100,000,000
		Liability–RSUs			100,000,000
		(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–RSU 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.

$\begin{array}{c}\begin{array}{l}\text{Compensation }\\ \text{expense}\end{array}\}\text{ = }\left\{\begin{array}{l}\text{Fair value as on December 31, 2018 }\times \\ \text{Number of RSUs granted }\times \\ \frac{\text{Number of years completed in vesting period}}{\text{Vesting period}}\end{array}\right\}\\ \text{= \$8}\times 50\text{,000,000 RSUs}\times \frac{\text{1 year}}{\text{4 years}}\\ =\$100,000,000\end{array}$ (1)

Prepare journal entry for compensation expense on December 31, 2019.

Date		Account Titles and Explanation	Post Ref.	Debit ($)	Credit ($)
2019
December	31	Compensation Expense		50,000,000
		Liability–RSUs			50,000,000
		(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–RSUs 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.

$\begin{array}{c}\begin{array}{l}\text{Compensation }\\ \text{expense}\end{array}\}\text{ = }\left\{\begin{array}{l}\left(\begin{array}{l}\text{Fair value as on December 31, 2019× }\\ \text{Number of RSUs granted × }\\ \frac{\text{Number of years completed in vesting period}}{\text{Vesting period}}\end{array}\right)\text{–}\\ \text{Compensation expense in 2018}\end{array}\right\}\\ \text{= }\left(\text{\$6×50,000,000 RSUs×}\frac{\text{2 years}}{\text{4 years}}\right)–\$100,000,000\\ =\$50,000,000\end{array}$ (2)

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		150,000,000
		Liability–RSUs			150,000,000
		(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–RSUs 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.

$\begin{array}{c}\begin{array}{l}\text{Compensation }\\ \text{expense}\end{array}\}\text{ =}\left[\begin{array}{l}\left\{\begin{array}{l}\text{Fair value as on December 31, 2020 × }\\ \text{Number of RSUs granted × }\\ \frac{\text{Number of years completed in vesting period}}{\text{Vesting period}}\end{array}\right\}\text{–}\\ \text{Compensation expense in 2018–}\\ \text{Compensation expense in 2019}\\ \end{array}\right]\\ \text{=}\left\{\begin{array}{l}\left(\text{\$8×50,000,000 RSUs×}\frac{\text{3 years}}{\text{4 years}}\right)\text{–}\\ \text{\$100,000,000–\$50,000,000}\end{array}\right\}\\ =\$150,000,000\end{array}$ (3)

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–RSUs		50,000,000
		Compensation Expense			50,000,000
		(To record compensation expense)

Table (4)

• Liability–RSUs 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.

$\begin{array}{c}\begin{array}{l}\text{Compensation }\\ \text{expense}\end{array}\}\text{ =}\left[\begin{array}{l}\left\{\begin{array}{l}\text{Fair value as on December 31, 2021 × }\\ \text{Number of RSUs granted × }\\ \frac{\text{Number of years completed in vesting period}}{\text{Vesting period}}\end{array}\right\}\text{–}\\ \text{Compensation expense in 2018–}\\ \text{Compensation expense in 2019}\\ \text{Compensation expense in 2020}\end{array}\right]\\ \text{=}\left\{\begin{array}{l}\left(\text{\$5×50,000,000 RSUs×}\frac{\text{4 years}}{\text{4 years}}\right)\text{–}\\ \text{\$100,000,000–\$50,000,000–\$150,000,000}\end{array}\right\}\\ =\$\left(50,000,000\right)\end{array}$ (4)

Note: Refer to Equations (1), (2) and (3) for value and computation of compensation expense in 2018, 2019, and 2020.

To determine

To prepare: Journal entry for the unexercised RSUs as on December 31, 2022

Explanation of Solution

Prepare journal entry to record unexercised RSUs as on December 31, 2022.

Date		Account Titles and Explanation	Post Ref.	Debit ($)	Credit ($)
2022
December	31	Compensation Expense		50,000,000
		Liability–RSUs			50,000,000
		(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–RSUs is a liability account. Since RSUs are unexercised by the employees, liability is increased on adjustment, and increase in liability is credited.

Working Notes:

Compute the amount of liability as at December 31, 2022.

$\begin{array}{c}\begin{array}{l}\text{Compensation }\\ \text{expense}\end{array}\}\text{ =}\left[\begin{array}{l}\left\{\begin{array}{l}\text{Fair value as on December 31, 2022 × }\\ \text{Number of RSUs granted × all}\end{array}\right\}\text{–}\\ \text{Compensation expense in 2018–}\\ \text{Compensation expense in 2019–}\\ \text{Compensation expense in 2020+}\\ \text{Compensation expense in 2021}\end{array}\right]\\ \text{=}\left\{\begin{array}{l}\left(\text{\$6 × 50,000,000 RSUs × all}\right)\text{–}\\ \text{\$100,000,000–\$50,000,000–}\\ \text{\$150,000,000+\$50,000,000}\end{array}\right\}\\ =\$50,000,000\end{array}$ (5)

Note: Refer to Equations (1), (2), (3), and (4) for value and computation of compensation expense in 2018, 2019, 2020 and 2021.

To determine

To journalize: The entry for RSUs exercised on June 6, 2023

Explanation of Solution

Journalize the entry for options exercised.

Date		Account Titles and Explanation	Post Ref.	Debit ($)	Credit ($)
2023
June	6	Compensation Expense		25,000,000
		Liability–RSUs			25,000,000
		(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–RSUs is a liability account. Since RSUs are exercised by the employees, liability is increased on adjustment, and liability is credited.

Working Notes:

Compute the amount of liability as at June 6, 2023.

$\begin{array}{c}\begin{array}{l}\text{Compensation }\\ \text{expense}\end{array}\}\text{ =}\left[\begin{array}{l}\left\{\begin{array}{l}\text{Market price on exercise date }\times \\ \text{Number of RSUs granted × all}\end{array}\right\}\text{–}\\ \text{Compensation expense in 2018–}\\ \text{Compensation expense in 2019–}\\ \text{Compensation expense in 2020+}\\ \text{Compensation expense in 2021–}\\ \text{Compensation expense in 2022}\end{array}\right]\\ \text{=}\left\{\begin{array}{l}\left(\text{\$6}\text{.50 × 50,000,000 RSUs × all}\right)\text{–}\\ \text{\$100,000,000–\$50,000,000–}\\ \text{\$150,000,000+\$50,000,000–\$50,000,000}\end{array}\right\}\\ =\$25,000,000\end{array}$

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 RSUs, which was a liability, as cash.

Date		Account Titles and Explanation	Post Ref.	Debit ($)	Credit ($)
2023
June	6	Liability–RSUs		325,000,000
		Cash			325,000,000
		(To record payment of liability of RSUs)

Table (7)

• Liability–RSUs is a liability account. Since RSUs are exercised, liability is decreased, and a decrease in liability is debited.
• Cash is an asset account. Since RSUs 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 RSUs granted.

$\begin{array}{c}\begin{array}{l}\text{Cash to be paid }\\ \text{for RSUs}\end{array}\}\text{ = }\left\{\begin{array}{l}\text{Market price on exercise date × }\\ \text{Number of RSUs granted}\end{array}\right\}\\ \text{= \$6}\text{.50×50,000,000 RSUs}\\ \text{= \$325,000,000}\end{array}$