Stock Compensation Expense
Practice as You Learn
Intermediate Accounting 2
Practice as You Learn
Practice Problem 1 – Stock Option Expense
On January 1, of the current year, the company granted a total of 200,000 stock options to purchase 200,000, $2 par common stock at an exercise price of $48 per share to employees. The options are earned and vest over a period of 5 years. The stock options had a fair market value of $6 on the date of the grant. The fair market value of the common stock on the grant date was $50. The options were exercised at the end of the 5th year when the stock price was $59 per share.
A. Calculate the total value of the options granted and the amount to be expensed each year.
B. Prepare all required journal entries from the grant date through the employee exercise date.
Answer
Practice Problem 1 – Stock Option Expense
A. Calculate the Stock Option Expense:
| FMV of the stock option | $6 |
| x # options granted | 200,000 |
| = Total Value of options granted | 1,200,000 |
| / Vesting period | / 5 |
| Expense for each period | 240,000 |
B. Journal Entries
Make this entry at the end of each year for 5 years:
| Stock Option Expense 240,000 Paid In Capital – Stock Options 240,000 |
Make the following entry at the end of the 5th year when the employees exercise the stock option.
Exercise means the employee buys common stock from the company at the exercise price which is less than fair market value.
| Cash 9,600,000 Paid In Capital – Stock Options 1,200,000 Common Stock 400,000 Paid in Capital – CS 10,400,000 |
Cash
200,000 shares purchased x $48 exercise price= 9,600,000
PIC – Stock Options
Remove the total amount that is in this account for the 200,000 options exercised
240,000 x 5 years = 1,200,000 total amount of options
Common Stock
par value x # shares
$2 x 200,000
PIC–CS
is always a plug to balance
Practice Problem 2 – Stock Appreciation Rights payment in cash
A company granted 100,000 stock appreciation rights to employees at the beginning of the current year. Employees will be compensated $1 cash for each dollar the stock price is above $35 at the end of three years. The fair market value of the stock was as follows:
| End of year 1 | $37.00 per share |
| End of year 2 | $39.00 per share |
| End of year 3 | $36.50 per share |
Record the journal entries required for the stock appreciation rights at the end of each of the 3 years
Answer
Practice Problem 2 – Stock Appreciation Rights payment in cash:
| Compute the expense for each year: | Year 1 | Year 2 | Year 3 |
| Fair Market Value of stock at the end | 37 | 39 | 36.50 |
| – Base price in the agreement | 35 | 35 | 35 |
| Increase in value of stock since agreement | 2 | 4 | 1.50 |
| x number of SARs issued | 100,000 | 100,000 | 100,000 |
| Total estimated amount to be paid at end | 200,000 | 400,000 | 150,000 |
| x Cumulative years / Total years of the right | 1 / 3 | 2 / 3 | 3 / 3 |
| Cumulative Expense to date | 66,667 | 266,667 | 150,000 |
| – Cumulative Expense recognized in prior years | 0 | 66,667 | 266,667 |
| Expense this year | 66,667 | 200,000 | (116,667) |
Journal Entries for
Year 1
| SAR Compensation Expense 66,667 SAR Liability 66,667 |
Year 2
| SAR Compensation Expense 200,000 SAR Liability 200,000 |
Year 3
|
SAR Liability 116,667 SAR Liability 150,000 |
By the 3rd year the company had overestimated the expense and expensed too much in prior years so they have to take some expense back
Cash is paid to the employees at the end of the 3rd year