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# Stock Compensation Expense

## 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.

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

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 Compensation Expense            116,667 SAR Liability                                       150,000            Cash                                                     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