Acct 592 – Spring 2011
Prof. Teresa Gordon
Solution - Example #4 - Restricted Stock Offering (RSO)
Graded Vesting with Straight-line attribution
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
12/31/18
12/31/19
12/31/20
12/31/21
$44.00
$45.00
$46.00
$47.00
$48.00
6,000 * .996 = 5,649
6,000 * .997 = 5,592
6,000 * .998 = 5,536
6,000 * .999 = 5,481
6,000 * .9910 = 5,426
27,684
Total
Compensation to
Recognize
248,556
251,640
254,656
257,607
260,448
1,272,907
Market Price
at Vesting
Shares that
Actually Vest
$57.00
$60.00
$62.00
$56.00
$65.00
6,000
6,000
5,600
5,600
5,000
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.
12/31/2011
Cash
Deferred compensation
Restricted Stock Plan
debit
300,000
1,272,907
credit
1,572,907
Note that deferred compensation expense is an owners’ equity contra-account to Restricted Stock Plan
Assume no shares are redeemed during period 2011 through 2017
Документ1 as of 4/11/20
Page 1
Acct 592 – Spring 2011
Prof. Teresa Gordon
Same entry would be made each year for 10 years – assuming no adjustment to forfeiture rate is necessary:
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.
12/31/2012
thru
12/31/2021
Compensation expense
Deferred tax expense (I/S)
Deferred income taxes (asset)
Deferred compensation
Debit
127,291
Credit
50,916
50,916
127,291
Beginning in year 2017, the shares begin to vest and 20% of restricted stock is exchanged for common stock and a tax
benefit is recognized for the difference between the price of the restricted shares at grant ($10) and the market price at
vesting when they become unrestricted.
12/31/2017
Market price at vesting
$57.00
Restricted stock purchase price
$10.00
Tax deduction per share
$47.00
Tax deduction = $47 * 6,000 shares vested = 282,000 * 40% = tax savings of 112,800.
Remove from deferred tax asset: $44 fair value * 6,000 options * 40% tax rate = $105,600
Excess tax deduction = ($47 - $44 fair value) = $3 * 6,000 * 40% = $7,200
Per share
12/31/2017 Restricted Stock Plan ($10 paid + $44 FV)
$54.00
Common stock
$5.00
Pd in capital in excess of par
$49.00
Number of shares that actually vest=
6,000
12/31/2017 Income taxes payable ($47 * 40% * 6,000 vested)
$18.80
Deferred income taxes ($44 * 40% * 6,000 vested)
$17.60
Income tax expense (deferred)
APIC - excess tax deductions (see above)
Income tax expense (current)
Debit
$324,000
Credit
30,000
294,000
502,207
502,207
112,800
105,600
105,600
7,200
105,600
218,400
218,400
ASC 718-10-35-8 (SFAS 123R Para. 42 test): The amount of compensation expense recognized so far must be at least 20% of
total: Check: $127,291 * 6 years = 763,746 divided by $1,272,907 = 60% OK
12/31/2018
Market price at vesting
$60.00
Restricted stock purchase price
$10.00
Tax deduction per share
$50.00
Tax deduction = 6,000 shares vested * $50 = 300,000 * tax rate 40% = tax savings of 120,000
Remove from deferred tax asset: $45 fair value * 6,000 options * 40% tax rate = $108,000
Excess tax deduction = ($50 - $45 fair value) = $5 * 6,000 * 40% = $12,000
Per share
Debit
12/31/2018 Restricted Stock Plan
$55.00
$330,000
Common stock
$5.00
Pd in capital in excess of par
$50.00
Income taxes payable
$20.00
120,000
Deferred income taxes
$18.00
Income tax expense (deferred)
108,000
APIC-excess tax deduction
Income tax expense (current)
Credit
30,000
300,000
108,000
12,000
108,000
ASC 718-10-35-8 (SFAS 123R Para. 42 test): The amount of compensation expense recognized so far must be at least 40% of
total: Check: $127,291 * 7 years = 891,037 divided by $1,272,907 = 70% OK
Документ1 as of 4/11/20
Page 2
Acct 592 – Spring 2011
Prof. Teresa Gordon
During 2019, 2 executives quit and were reimbursed for 600 shares each (600 shares * $10 * 2 = $12,000)
Debit
Credit
Restricted stock plan
$12,000
Cash
$12,000
We will adjust compensation expense to actual at the vesting of the last tranche because we are using straight-line
attribution method.
12/31/2019
Market price at vesting
$62.00
Restricted stock purchase price
$10.00
Tax deduction per share
$52.00
Tax deduction = $52 * 5,600 shares vested = 291,200 * 40% = tax savings of $116,480.
Remove from deferred tax asset: $46 fair value * 5,600 options * 40% tax rate = $103,040
Excess tax deduction = ($52 - $46 fair value) = $6 * 5,600 * 40% = $13,440
Per share
Debit
12/31/2019 Restricted Stock Plan
$56.00
$313,600
Common stock
$5.00
Pd in capital in excess of par
$51.00
12/31/2019 Income taxes payable
$20.80
116,480
Deferred income taxes
$18.40
Income tax expense (deferred)
103,040
APIC - excess tax deduction
Income tax expense (current)
Credit
28,000
285,600
103,040
13,440
103,040
ASC 718-10-35-8 (SFAS 123R Para. 42 test): The amount of compensation expense recognized so far must be at least 60% of
total: Check: $127,291 * 8 years = 1,018,326 divided by $1,272,907 = 80% OK
12/31/2020
Market price at vesting
$56.00
Restricted stock purchase price
$10.00
Tax deduction per share
$46.00
Tax deduction = $46 * 5,600 shares vested = 257,600 * 40% = tax savings of $103,040.
Remove from deferred tax asset: $47 fair value * 5,600 options * 40% tax rate = $105,280
Excess tax deduction = ($46 - $47 fair value) = (-$1 * 5,600 * 40%) = debit of $2,240
Since there is NO excess tax deduction, we would have to charge net income unless we have accumulated sufficient
credits in “APIC–excess tax deductions” in the past. From T-accts, current balance is $32,640 credit. So there is
enough and net income will not be affected.
12/31/2020
Restricted Stock Plan
Common stock
Pd in capital in excess of par
Income taxes payable
Deferred income taxes
Income tax expense (deferred)
APIC - excess tax deduction
Income tax expense (current)
Per share
$57.00
$5.00
$52.00
$18.40
$18.80
Debit
$319,200
Credit
28,000
291,200
103,040
105,280
105,280
2,240
105,280
ASC 718-10-35-8 (SFAS 123R Para. 42 test): The amount of compensation expense recognized so far must be at least 80% of
total: Check: $127,291 * 8 years = 1,145,616 divided by $1,272,907 = 90% OK
During 2021, 3 executives quit and were reimbursed for 200 shares each (200 shares * $10 * 3 = $6,000)
Debit
Credit
Restricted stock plan
$6,000
Cash
$6,000
We will adjust compensation expense to actual at the vesting of the last tranche because we are using straight-line
attribution method.
12/31/2021
Market price at vesting
Документ1 as of 4/11/20
$65.00
Page 3
Acct 592 – Spring 2011
Prof. Teresa Gordon
Restricted stock purchase price
$10.00
Tax deduction per share
$55.00
5,000 shares, Tax deduction = 250,000, tax rate = 40%, tax savings = 100,000
Tax deduction = $55 * 5,000 shares vested = 275,000 * 40% = tax savings of $110,000.
Remove from deferred tax asset: $48 fair value * 5,000 options * 40% tax rate = $96,000
Excess tax deduction = ($55 - $48 fair value) = $7 * 5,000 * 40% = $14,000
Per share
Debit
12/31/2021 Restricted Stock Plan
$58.00
$290,000
Common stock
$5.00
Pd in capital in excess of par
$53.00
12/31/2021 Income taxes payable
$22.00
110,000
Deferred income taxes
$19.20
Income tax expense (deferred)
96,000
APIC - excess tax deduction
Income tax expense (current)
Credit
25,000
265,000
96,000
14,000
96,000
Adjust accounts for estimation errors related to forfeiture rate:
Vesting date
Fair value
12/31/17
12/31/18
12/31/19
12/31/20
12/31/21
$44.00
$45.00
$46.00
$47.00
$48.00
Projected
Adjustment
Deferred tax
@ 40%
12/31/21 Adjusting entry
Compensation expense
Income tax expense (deferred)
Restricted stock plan
Deferred tax asset
Документ1 as of 4/11/20
Shares that
Actually Vest
6,000
6,000
5,600
5,600
5,000
28,200
27,684
Debit
21,893
Actual
compensation
$264,000
$270,000
$257,600
$263,200
$240,000
1,294,800
1,272,907
21,893
8,757
Credit
8,757
21,893
8,757
Page 4
Acct 592 – Spring 2011
Prof. Teresa Gordon
T-Accounts for Straight-line Attribution Method in Graded Vesting Situation
12/31/2011
12/31/2012
12/31/2013
12/31/2014
12/31/2015
12/31/2016
12/31/2017
12/31/2018
12/31/2019
12/31/2020
12/31/2021
Deferred Compensation
1,272,907
127,291
127,291
127,291
127,291
127,291
127,291
127,291
127,291
127,291
127,291
1,272,907
12/31/2012
12/31/2013
12/31/2014
12/31/2015
12/31/2016
12/31/2017
12/31/2018
12/31/2019
12/31/2020
12/31/2021
1,272,907
Deferred Income Taxes
50,916
50,916
50,916
50,916
50,916
50,916
105,600
50,916
108,000
50,916
103,040
50,916
105,280
50,916
96,000
8,757
517,920
1,272,907
1,145,616
1,018,326
891,035
763,744
636,454
509,163
381,872
254,581
127,291
0
0
12/31/2011
12/31/2017
12/31/2018
12/31/2019
12/31/2020
12/31/2021
12/31/2021
Restricted Stock Plan
1,572,907
$ 324,000
$ 330,000
$ 313,600
(12,000)
$ 319,200
$ 290,000
(6,000)
21,893
1,576,800
50,916
101,833
152,749
203,665
254,581
199,898
142,814
90,690
36,327
(8,757)
(0)
12/31/2012
12/31/2013
12/31/2014
12/31/2015
12/31/2016
12/31/2017
12/31/2018
12/31/2019
12/31/2020
12/31/2021
12/31/2021
Compensation Expense
$ 127,291
$ 127,291
$ 127,291
$ 127,291
$ 127,291
$ 127,291
$ 127,291
127,291
127,291
127,291
21,893
-
1,576,800
Income Tax Expense (deferred)
12/31/2012
50,916
12/31/2013
50,916
12/31/2014
50,916
12/31/2015
50,916
12/31/2016
50,916
12/31/2017
105,600
50,916
12/31/2018
108,000
50,916
12/31/2019
103,040
50,916
12/31/2020
105,280
50,916
12/31/2021
96,000
50,916
12/31/2021
8,757
517,920
517,920
1,294,800
2,240
-
517,920
(105,600)
(213,600)
(316,640)
(421,920)
(517,920)
(517,920)
Market Value
$
57.00
$
60.00
$
62.00
$
56.00
$
65.00
Actual option
value
$
47.00
$
50.00
$
52.00
$
46.00
$
55.00
Credited to APIC - other
Total reduction in tax expense
Page 5
Number of
options
6,000
6,000
5,600
5,600
5,000
127,291
254,581
381,872
509,163
636,454
763,744
891,035
1,018,326
1,145,616
1,272,907
1,294,800
-
APIC - excess tax deduction
12/31/2011
12/31/2017
7,200
12/31/2018
12,000
12/31/2019
13,440
12/31/2020
2,240
12/31/2021
14,000
(50,916)
(101,833)
(152,749)
(203,665)
(254,581)
(199,898)
(142,814)
(90,690)
(36,327)
8,757
0
517,920
Income Tax Expense (current)
12/31/2012
12/31/2013
12/31/2014
12/31/2015
12/31/2016
12/31/2017
105,600
12/31/2018
108,000
12/31/2019
103,040
12/31/2020
105,280
12/31/2021
96,000
Документ1 as of 4/11/20
(1,572,907)
(1,248,907)
(918,907)
(593,307)
(274,107)
21,893
-
(7,200)
(19,200)
(32,640)
(30,400)
(44,400)
(44,400)
(44,400)
(44,400)
(44,400)
(44,400)
46,640
Total Tax
Deduction
112,800
120,000
116,480
103,040
110,000
562,320
44,400 Should be
517,920
517,920
-