Acct 592 – Spring 2011
Prof. Teresa Gordon
EXAMPLE #1A - STOCK APPRECIATION RIGHTS (SARS)
Share-based Compensation Classified as Liability –
Nonpublic Entity Electing Intrinsic Value Method
Musick Corporation offered stock appreciation rights (SARS) to its president, Sally Musick, on the
appreciation of 10,000 shares of Musick Corporation common stock. The SARS were granted on December
31, 2009 when the stock was selling for $20 per share. Ms. Musick was to receive all price appreciation from
the date of the grant until the date of exercise in the form of cash. The exercise date was identified as
January 1, 2012, and the SARS were set to expire July 1, 2014 if not exercised. The relevant market prices
are given in the following table. Assume that Ms. Musick exercised the SARS on March 1, 2014. The
income tax rate for Musick Corporation is 30%.
12 mos.
Grant date
12/31/09
12 mos.
12/10
12 mos.
12/11
12 mos.
12/12
Service Period
6 mos.
12/31/13
7/1/14
Exercise Period
No forfeitures are estimated since Ms. Musick is the major stockholder and essentially controls the board of
directors. However, the stock rarely trades even privately and the company elects to use the intrinsic value
method. Fair values of the company’s shares are estimated annually using valuation techniques described in
the AICPA Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation.
Date
Fair
Value
Base
Price
12/31/09
$20
$20
12/31/10
$25
$20
Total
Compensation
Journal Entry
Pct
0%
Debit
None
Compensation Expense
Share-based compensation liability
Deferred tax asset
Deferred tax benefit (I/S)
12/31/11
Vesting
Date
$19
12/31/12
$30
$20
Compensation Expense
Share-based compensation liability
Deferred tax asset
Deferred tax benefit (I/S)
$20
Compensation Expense
Share-based compensation liability
Deferred tax asset
Deferred tax benefit (I/S)
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Prof. Teresa Gordon
Example 1A, continued
Date
12/31/13
Fair
Value
$32
Base
Price
Total
Compensation
Journal Entry
Pct
Debit
$20
Compensation Expense
Share-based compensation liability
Deferred tax asset
Deferred tax benefit (I/S)
3/1/14
$31
$20
Compensation Expense
Share-based compensation liability
Deferred tax asset
Deferred tax benefit (I/S)
Share-based compensation liability
Cash
Current taxes payable
Current tax expense (I/S)
Deferred tax benefit (I/S)
Deferred tax asset
This method is can only be used by nonpublic entities for awards classified as liabilities. If the award was
classified as an equity award because no cash settlement was permitted, the award would have to be
accounted for by the fair value method even if the company’s shares are not publicly traded.
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Prof. Teresa Gordon
Example #1B - Stock Appreciation Rights (SARS)
Share-based Compensation Classified as Liability
Publicly-traded Company (or Nonpublic Entity Electing Fair Value Method)
Musick Corporation offered stock appreciation rights (SARS) to its president, Sally Musick, on the
appreciation of 10,000 shares of Musick Corporation common stock. The SARS were granted on December
31, 2009 when the stock was selling for $20 per share. Ms. Musick was to receive all price appreciation from
the date of the grant until the date of exercise in the form of cash. The exercise date was identified as
January 1, 2012, and the SARS were set to expire July 1, 2014 if not exercised. The relevant market prices
are given in the following table. Assume that Ms. Musick exercised the SARS on March 1, 2014. The
income tax rate for Musick Corporation is 30%.
12 mos.
Grant date
12/31/09
12 mos.
12/31/10
12 mos.
12/31/11
12 mos.
12/31/12
Service Period
6 mos.
12/31/13
7/1/14
Exercise Period
No forfeitures are estimated since Ms. Musick is the major stockholder and essentially controls the board of
directors. Assume that the shares not held by Ms. Musick are publicly traded on an over-the-counter market.
Since this is an award classified as a liability, the fair value of the SARS must be estimated on each balance
sheet date until exercised (settled).
Mkt
Value
FV
SARS
12/31/09
$20
$10
12/31/10
$25
$13
Date
Total
Compensation
Journal Entry
Pct
0%
Debit
None
Compensation Expense
Share-based compensation liability
Deferred tax asset
Deferred tax benefit (I/S)
12/31/11
Vesting
Date
$19
12/31/12
$30
$5
Compensation Expense
Share-based compensation liability
Deferred tax asset
Deferred tax benefit (I/S)
$15
Compensation Expense
Share-based compensation liability
Deferred tax asset
Deferred tax benefit (I/S)
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Example 1B, continued
Date
12/31/13
Mkt
Value
FV
SARS
$32
$12.75
Total
Compensation
Journal Entry
Pct
Debit
Compensation Expense
Share-based compensation liability
Deferred tax asset
Deferred tax benefit (I/S)
3/1/14
$31
$11
Compensation Expense
Share-based compensation liability
Deferred tax asset
Deferred tax benefit (I/S)
Share-based compensation liability
Cash
Current taxes payable
Current tax expense (I/S)
Deferred tax benefit (I/S)
Deferred tax asset
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Example #1C - Stock Appreciation Rights (SARS)
Share-based Compensation Classified as Equity
Publicly-traded Company or Nonpublic Entity
Cash settlement not permitted
Musick Corporation offered stock appreciation rights (SARS) to its president, Sally Musick, on the
appreciation of 10,000 shares of Musick Corporation common stock. The SARS were granted on December
31, 2009 when the stock was selling for $20 per share. Ms. Musick was to receive all price appreciation from
the date of the grant until the date of exercise in the form of shares of Musick Corporation common stock
(par value $10 each). The exercise date was identified as January 1, 2012, and the SARS were set to expire
July 1, 2014 if not exercised. The relevant market prices are given in the following table. Assume that Ms.
Musick exercised the SARS on March 1, 2014. The income tax rate for Musick Corporation is 30%.
12 mos.
Grant date
12/31/09
12 mos.
12/31/10
12 mos.
12/31/11
12 mos.
12/31/12
Service Period
6 mos.
12/31/13
7/1/14
Exercise Period
No forfeitures are estimated since Ms. Musick is the major stockholder and essentially controls the board of
directors. Assume that the shares not held by Ms. Musick are publicly traded on an over-the-counter market.
Date
FV
Stock
12/31/09
$20
12/31/10
$25
FV
SARS
$10
Total
Compensation
Journal Entry
Pct
0%
Debit
None
Compensation Expense
APIC - SARS
Deferred tax asset
Deferred tax benefit (I/S)
12/31/11
Vesting
Date
$19
12/31/12
$30
No adjustment to Compensation Expense after vesting
12/31/13
$32
No adjustment to Compensation Expense after vesting
Compensation Expense
APIC - SARS
Deferred tax asset
Deferred tax benefit (I/S)
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Example 1C, continued
Date
3/1/14
Settlement
Date
FV
Stock
$31
FV
SARS
Total
Compensation
Journal Entry
Pct
Debit
$10
APIC - SARS
Base
Price =
$20
Common stock ($10 par)
APIC – common stock
Deferred tax benefit (I/S)
Deferred tax asset
Actual tax deduction based on intrinsic value at settlement
Current taxes payable
Current tax expense (I/S)
APIC – excess tax deduction
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HOMEWORK A
1.
Stone Inc. offered stock appreciation rights (SARS) to its president, Richard Rock, on the appreciation of
100,000 shares of Stone Inc. common stock. The SARS were granted on December 31, 2014 when the stock
was selling for $30 per share. Mr. Rock will receive all price appreciation from the date of the grant until the
date of exercise in the form of cash. The earliest possible exercise date was identified as January 1, 2017,
and, if not exercised, the SARS will expire on July 1, 2018. The relevant market prices for Stone Co. stock
are given in the table below along with the fair value estimates for the SARS. Assume that Mr. Rock
exercised all of his SARS on March 1, 2018. Stone’s marginal tax rate is 30%. Mr. Rock holds 51% of the
voting shares and is not expected to retire until 2020. The par value of the stock is $1.
Date
2.
Market
Price
Base
Price
Fair Value of SARS computed using Binomial
Pricing Model
12/31/14
$30
$30
$6.00
12/31/15
$36
$30
$8.25
12/31/16
$29
$30
$3.50
12/31/17
$33
$30
$6.30
03/01/18
$39
$30
$9.50
07/01/18
$41
$30
$11.00
a.
Prepare all necessary entries on Stone Inc.’s books assuming that Stone Inc. is a public company with stock
trading on the New York Stock Exchange.
b.
Prepare all necessary entries on Stone Inc.’s books assuming that the appreciation earned by Mr. Rock cannot
be paid in cash. Instead, he will receive shares of Stone Inc. common stock with a value equal to the
appreciation from grant date to exercise date.
Research questions:
Determine the measurement date(s) and requisite service period(s) for the following awards:
a.
An award specifies that vesting will occur after four years of continuous employee service OR when
a new product currently under development is officially launched. The employer estimates that it is
probable that the product will be launched by the end of the third year of the award.
b.
An award is negotiated with a company’s CEO relating to 200,000 options with an exercise price of
$20 each. The award is structured so that 40,000 options will vest or be forfeit in each of the next 5
years depending on whether performance targets related to the company’s market share are
achieved. A five year plan establishes the targets at the inception of the plan. Forfeiture of the
options in a particular year will not affect the outcome for any other tranche of 40,000 options. If the
CEO does not remain employed by the company, any unvested options at the termination date will
be forfeit.
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Prof. Teresa Gordon
Example 2 – Options With Cliff Vesting
Share-based Compensation Classified as Equity – with Service Condition Only
On December 31, 2010, Genessee Engineering, Inc. gave its executives stock options that entitle them to
purchase up to 5,000 shares of Genessee Engineering company stock for $20 per share. The executives
cannot exercise the options until the end of 2012, and they must decide whether to exercise their option to
buy stock at $20 per share on or before July 1, 2013. To remain eligible for the stock options, they have to
remain in the employment of Genessee Engineering. On December 31, 2010, the date of the grant, Genessee
Engineering stock was selling for $25 per share. Assume that the fair value of the options at 12-31-10 was
$9.00 each and that there were 20 executives eligible for participation. Based on past history, Genessee
Engineering expects a 5% annual turnover rate among its executives. The company’s income tax rate is
34%.
12 mos.
Grant date
12/31/10
12 mos.
12/31/11
Service Period
6 mos.
1231/12
7/1/13
Exercise
Period
12/31/10 (Mkt. price $25)
12/31/11 (Market value $19), 1 executive quit during 2011
Compensation expense
Additional Paid-in Capital - stock options
Deferred tax asset
Income tax expense (deferred)
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Prof. Teresa Gordon
12/31/12 (Market value $27), another executive quit during 2012
Compensation expense
Additional Paid-in Capital - stock options
Deferred tax asset
Income tax expense (deferred)
APIC - Stock Options
Deferred Tax Asset
Assume that on April 1, 2013, executives exercised 85,000 of the stock options purchasing 85,000 shares of Genessee
Engineering common stock ($10 par value) for $20 per share. The market price was $30. Assume that the stock
market crashed early in May, 2013 and the one executive was never able to exercise the remaining 5,000 options.
Instead, they expired on July 1, 2013 when the stock price was $15.
Note: Actual value of option is greater than amount computed at grant date.
4/1/13 (Market price $30), 85,000 options exercised
Cash
Additional paid-in capital - stock options
Common stock ($10 par)
Paid in capital in excess of par
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Prof. Teresa Gordon
Example 2, continued
The actual tax deduction will be $10 per share or $850,000 * .34 = $289,000
We need to zero out the amounts set up in deferred taxes and record actual amount due to government.
The “unanticipated” tax savings are considered an addition to paid-in capital.
Income tax expense (deferred)
Deferred tax asset
Income taxes payable
Income tax expense (current)
APIC – excess tax deduction
7/1/13 (Market price $15), 5,000 remaining options expire
APIC - stock options
Additional paid-in capital - expired stock options
Deferred tax asset
Income tax expense (deferred)
(There will never be a deduction for these options. Therefore, there is no effect on current taxes payable)
Note – under SFAS 123 there was an alternate accounting treatment that let companies wait until options were
actually forfeit. This is no longer permitted under SFAS No. 123 Revised (2004) – companies must estimate the
number of shares that will be exercised when they measure initial compensation expense (see FAS123(R), Par. 43)
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Prof. Teresa Gordon
Earnings Per Share Computations
Options Example 2 (Cliff Vesting)
Assume that Genessee Engineering has no potentially dilutive securities other than the executive stock options. There
are no preferred stock and no convertible bonds. The fair value of the options was $9.00 at the grant date. Compute
earnings per share for 2010, 2011, 2012, and 2013 using the following additional information. Refer to Illustration 8
in SFAS No. 128 as revised by SFAS No. 123(R) in 2004.
Year
2010
2011
2012
2013
Net income
$970,000
$1,000,000
$1,200,000
$1,300,000
Options Outstanding at end
of year
100,000
95,000
90,000
0 at 12/31
85,000 exercised at 4/1
5,000 expired on 7/1
Weighted Average
Shares of Common
Stock Outstanding
250,000
250,000
300,000
To be computed,
beginning of year =
325,000
Average market price
$24.32
$24.95
$26.82
For 1/1 to 4/1 $30.25
For 1/1 to 7/1 $27.56
We’ll come back and work on doing earnings per share for Example 2 later
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Tax
rate
34%
34%
34%
34%
Acct 592 – Spring 2011
Prof. Teresa Gordon
Example 3 – Options with Performance Condition
On December 31, 2011, Palouse Paper Products (PPP) issued at-the-money options to its divisional executives at the
rate of 10 options for each $100 in annual salary. After vesting, the options can be converted one for one into the $1
par value common shares at any time through July 1, 2016. Options vest on December 31, 2014 if performance targets
have been met by that date and the executive is still employed by PPP. On the grant date, the closing market price of
PPP common stock was $30 and the fair value of the options was determined to be $12. The tax rate is 40%.
Under the program, a total of 75,000 options were issued to the 10 divisional vice presidents. Each option vests if the
market share of a division’s product line grows by 10 percentage points by the end of 2014. Initially, the achievement
of these “stretch” goals is not considered probable. The executive turnover rate is estimated at 5% per year.
12 mos.
Grant date
12/31/11
12 mos.
12/31/12
12 mos.
12/31/13
Implied Service Period
12/31/11
Market Price PPP stock = $30
Options expected to be outstanding at 12/31/14 =
12/31/12
Market Price PPP stock = $32
Options expected to be outstanding at 12/31/14 =
12 mos.
12/31/14
6 mos.
12/31/15
7/1/16
Exercise Period
Toward the end of 2013, sales growth for several products makes achievement of goals probable. Vice presidents of
those divisions hold 55% of the options. None of the vice presidents left employment during 2012 or 2013 so the
expected turnover rate is lowered to 3%.
12/31/13
Market Price PPP stock = $37
Options expected to be outstanding at 12/31/14 =
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Prof. Teresa Gordon
Example 3, continued
By the end of 2014, five divisions had achieved their market share targets, but one of the five vice presidents had been
fired before year end leaving just 36,000 options to vest.
12/31/14
Market Price PPP stock = $39
12/31/15
Market Price PPP stock = $40
6/15/16
All options exercised when market price of PPP common stock = $43
6/15/16
Cash
APIC – stock options outstanding
Common stock ($1 par)
APIC – common stock
6/15/16
Income tax expense (deferred)
Deferred tax asset
Current taxes payable
Income tax expense (current)
APIC – excess tax deduction
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Prof. Teresa Gordon
HOMEWORK B
Equity Awards with Service or Performance Conditions
1.
2.
Cliff Vesting Options - Service Condition Only.
On April 1, 2011, USQ Inc. gave its executive officers stock options that entitle them to purchase a total of
150,000 shares of USQ stock for $10 per share. The common stock has a $1 par value. The executives
cannot exercise the options until April 1, 2014, and they must decide whether to exercise their options to buy
stock at $10 per share on or before December 31, 2014. To remain eligible for the stock options, the
executives must remain in the employment of USQ. Assume that the estimated fair value of the options on
the grant date is $4 per share using a computerized option pricing model. Based on past history, USQ
expects a 3% annual turnover rate among its executives. The corporate tax rate is 34%. (Do not ignore
deferred taxes).
a.
Prepare the journal entry needed at 12/31/11 to record the compensation expense assuming that no
adjustment in the original assumption of 3% turnover is needed because no executives quit between
April through December. The stock price on 12/31/11 was $12 per share.
b.
Prepare the journal entry needed at 12/31/12 to record compensation expense. Assume that the
company decides its estimate of 3% turnover was too low. The new estimate is based on 5% annual
turnover. The stock price on 12/31/12 was $13 per share.
c.
Prepare the journal entry needed at 12/31/13 to record compensation expense. Assume that the 5%
turnover rate is still considered accurate.
d.
Prepare the journal entry needed at 4/1/14 when 130,000 options vest. The stock price at 4/1/14 is
$15 per share.
e.
Assume that all 130,000 options are exercised on 9/16/14 when the stock price rises to $20 per
share.
Stock based award with a performance condition.
On January 1, 2011, the CEO of KanDu Inc. (John Adams) is granted 10,000 options. The award specifies
that vesting will occur after four years of continuous employee service OR when a new product currently
under development is officially launched. The KanDu Inc. estimates that it is probable that the product will
be launched by the end of the third year of the award. The option price is $20 which is the market price of
KanDu shares on the grant date. At the grant date, the fair value of the award is $7 per share, determined
using the binomial pricing model. The options expire December 31, 2015. Assume that the tax rate for
KanDu Inc. is 30%. [You may ignore the forfeiture issue since John Adams is the majority shareholder and
is not expected to retire for at least 10 years.]
Prepare the journal entries necessary through vesting. Assume that at the end of 2013, everyone knows the product
will be launched within the next six months. The actual launch date is April 1, 2014 and Mr. Adams exercises all the
options on Sept. 25, 2015 when the market price is $33 per share. The par value of KanDu stock is $1.
For both problems:
There is more than one reasonable way to handle changes in accounting estimates. Accordingly, you must include
T-accounts with your answer so that both of us (student and professor) can see if your method “worked out”
correctly. At a minimum, T-accounts should include “APIC-stock options outstanding” and “Deferred Tax Assets.”
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Prof. Teresa Gordon
Example #4 - Restricted Stock Offering (RSO)
Graded Vesting
On December 24, 2011, for a Christmas bonus, Colfax Calendars Corporation (CCC) offered each of its top managers
the right to purchase shares of its $5 par value common stock at less than its market value. CCC's stock was selling
for $40 per share (on 12/24/11) and the managers were allowed to purchase up to 1,000 shares each for $10 per share.
However, there were some restrictions attached to this offering. First, the employees had to make up their minds and
purchase the shares before December 31, 2011. Second, the stock was restricted such that the employees could not
sell the stock for ten years. In addition, they could not use the stock for collateral during this period. If they left the
employment of CCC while the stock was restricted, the corporation would buy the stock back at $10 per share. This
restriction would be lifted each year for years 6 to 10. That is, 20 percent of the shares purchased would become
unrestricted at the end of each year from 2017 through 2021. By December 31, 2011, CCC employees had purchased
30,000 of these restricted shares (RSOs). Assume that the corporate tax rate is 40% in all years. The market prices at
the vesting dates are included in the following time-line. The fair values for each tranche are displayed in the table
below. The income tax rate is 40%. The company gets a tax deduction equal to the difference between the market
price on the vesting date and the option price paid by the employee at the grant date. Anticipated turnover is 1% per
year.
1
12/24/11
Grant date
12/31/11 12
Measurement
date
2
3
13
4
14
5
15
Exercise
Period
16
6
$57
17
7
$60
18
8
$62
19
9
$56
20
10
$65
21
Implied Service Period
Vesting date
Fair value
Number of Shares
Expected to Vest
12/31/17
$44.00
6,000 * .996 = 5,649
12/31/18
$45.00
6,000 * .997 = 5,592
8
Total
Compensation to
Recognize
Market Price
at Vesting
Shares that
Actually Vest
248,556
$57.00
6,000
251,640
$60.00
6,000
12/31/19
$46.00
6,000 * .99 = 5,536
254,656
$62.00
5,600
12/31/20
$47.00
6,000 * .999 = 5,481
257,607
$56.00
5,600
6,000 * .99 = 5,426
260,448
$65.00
5,000
27,684
1,272,907
12/31/21
$48.00
10
28,200
Note that the information in the final two columns is not known initially – facts are provided in this format for simplicity to provide
data needed to prepare the journal entries. Note that no adjustments to the original assumption regarding forfeitures was needed
during the 10 year period.
12/31/11 (Mkt price $41)
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Prof. Teresa Gordon
Example 4, continued
12/31/12 through 12/31/21 – Same entry to record estimated compensation (using straight-line attribution method)
12/31/17 – Market Price $57 - Recognize vesting of first tranche with related income tax impact
There is a required test under ASC 718-10-35-8 (SFAS 123R Para. 42 test): if you use the straight-line attribution method. Per
ASC 718-10-35-8, the amount of compensation expense recognized so far must be at least the amount vested. At 12/31/09, 20%
of the restricted shares have vested. Check: compensation expense $127,291 * 6 years = 763,746 divided by $1,272,907 total
estimated compensation expense= 60%. So we don’t need to make an adjustment. In this example, there is no problem at any of
the vesting dates but you’d probably have trouble if larger numbers vested early [Example: 200,000 options vesting 100,000,
50,000, 25,000, 25,000]
12/31/18 – Market Price $60 - Recognize vesting of second tranche with related income tax impact
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Example 4, continued
2019 – 2 executives quit, each holding 600 shares (200 in each of the last three tranches)
See ASC 718-20-55-33 (SFAS123R, para. A103) - we must adjust compensation expense to ACTUAL
number vested. With the straight-line method, it makes sense to wait to adjust until the last tranche vests. If
we were using the graded vesting method (treating each tranche separately), we would probably need to
adjust to actual at the vesting date of each individual tranche.
12/31/19 – Market price $62 – recognize vesting of third tranche (5,600 shares)
And so on. When testing out a new accounting process, it is important to make sure accounts that are supposed to
zero out actually zero out. I find it very helpful to do T-accounts (like the ones on the next page) to verify that I have
made the journal entries properly.
See separate solution file for complete set of journal entries and t-accounts
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Prof. Teresa Gordon
Deferred Compensation
Restricted Stock Plan
Deferred Income Taxes
Income Tax Expense (deferred)
Compensation Expense
Paid in Capital in Excess of Par
Income Tax Expense (current)
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EXAMPLE 4 - ALTERNATE ATTRIBUTION METHOD
We used a FASB-permitted “straight-line attribution method” over a ten year period, treating the RSO as a single
award. SFAS No 123R, paragraph 42 would also permit the RSO arrangement in Example 4 to be treated as insubstance multiple awards. Each tranche of 6,000 shares would have its own requisite service period. See Illustration
4(b) that begins in Paragraph A97. Instead of recognizing the same amount of compensation expense each year for 10
years, we would recognize the same amount in each of the years before vesting and decreasing amounts as the shares
vest – as shown on the following table. Otherwise, the entries would be the same.
Tranche Number
Year
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
Total
1
2
3
4
$
$
$
$
$
$
11,298
11,298
11,298
11,298
11,298
11,298
$
$
$
$
$
$
$
11,184
11,184
11,184
11,184
11,184
11,184
11,184
$
$
$
$
$
$
$
$
10,380
10,380
10,380
10,380
10,380
10,380
10,380
10,380
$
$
$
$
$
$
$
$
$
10,353
10,353
10,353
10,353
10,353
10,353
10,353
10,353
10,353
$
67,788
$
78,288
$
83,040
$
93,177
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5
$ 10,852
$ 10,852
$ 10,852
$ 10,852
$ 10,852
$ 10,852
$ 10,852
$ 10,852
$ 10,852
$ 10,852
$ 108,520
Compensation to
Recognize during Year
$
54,067
$
54,067
$
54,067
$
54,067
$
54,067
$
54,067
$
42,769
$
31,585
$
21,205
$
10,852
$
430,813
Page 19
Acct 592 – Spring 2011
Prof. Teresa Gordon
HOMEWORK C
Graded Vesting
Merlin Manufacturing Inc. awards 400,000 options on March 1, 2010 to 50 managers (8,000 options each). The
options were at-the-money on the grant date when the stock price was $39.00. The options vest according to the
following schedule:
Vesting Date
March 1, 2012
March 1, 2013
March 1, 2014
March 1, 2015
Fair Value
$9
$13
$18
$22
Percentage
Vested
25%
25%
25%
25%
Expiration Date
(all tranches)
December 31, 2020
(or within 3 months of
termination)
At the grant date, the anticipated forfeiture rate is 2%. Round forfeiture estimates to whole employees so that you
forecast eliminating all unvested options held by a terminated employee. The company has a calendar year fiscal year.
It is not necessary to make quarterly entries. Assume the tax rate is 30% throughout the period. The common stock has
a $5 par value. Information on forfeitures, exercise, and market values are presented below:
Vesting Date
Actual Options Vested
3/1/2012
3/1/2013
3/1/2014
3/1/2015
98,000
92,000
82,000
80,000
Exercise Date
Number of Options Exercised
12/5/2014
2/13/2015
12/10/2015
12/3/2019
12,000
18,000
54,000
268,000
Market Value of Common Stock
at Vesting Date
$48.00
$54.25
$49.00
$52.00
Market Value of Common Stock
at Exercise Date
$50.00
$55.00
$55.50
$62.00
After the first two tranches vest at 3/1/13, the company revises its estimated number of options expected to vest using
a retroactive 3% turnover rate. (Hint: it may be easier to make the adjustment through the end of the previous year
rather through 3/1/13. Doing it this way might make the recognition of compensation expense for 2013 simpler to
compute since it would then be for a full year using the new number of options anticipated.)
Requirements:
1.
Assume that the company uses the straight-line attribution method permitted under SFAS No. 123R.
Since the company does not keep track of the tranche from which each option originated, it chooses the
first-vested, first-exercised basis to determine the fair value of options exercised - like the first-in, firstout inventory method. In other words, they are accounting for the four tranches as a single award.
2.
Assume that the company uses the graded-attribution method permitted under SFAS No. 123R. This is
consistent with treating each of the four tranches as a separate award. The company keeps track of the
tranches from which each option originated but you may assume that the actual exercises through 2015
are from the first tranche (to keep it the same as #1).
See illustrations that start at about ASC 718-20-55-25
You MUST include T-accounts with your solution so that both of us will know your journal entries accomplished
the intended purpose
Document1 as of 2/9/16
Page 20