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Chapter 16: Q13IFRS (page 896)

Assume that Sarazan Company has a share-option plan for top management. Each share option represents the right to purchase a \(1 par value ordinary share in the future at a price equal to the fair value of the shares at the date of the grant. Sarazan has 5,000 share options outstanding, which were granted at the beginning of 2017. The following data relate to the option grant.

Exercise price for options \)40

Market price at grant date (January 1, 2017) \(40

Fair value of options at grant date (January 1, 2017) \)6

Service period 5 years

Instructions

(a) Prepare the journal entry(ies) for the first year of the share-option plan.

(b) Prepare the journal entry(ies) for the first year of the plan assuming that, rather than options, 700 shares of restricted shares were granted at the beginning of 2017.

(c) Now assume that the market price of Sarazan shares on the grant date was $45 per share. Repeat the requirements for (a) and (b).

(d) Sarazan would like to implement an employee share-purchase plan for rank-and-file employees, but it would like to avoid recording expense related to this plan. Explain how employee share-purchase plans are recorded?

Short Answer

Expert verified
  1. The journal entries are recorded in Step 1.
  2. The journal entries are recorded in Step 2
  3. The journal entries are recorded in Step 3.
  4. Whether an employee has a qualified or a disqualified demeanour decides the amount of the pay that is on an employee's W-2.

Step by step solution

01

(a) The journal entry(ies) for the first year

Date

Account titles and Explanation

Debit

Credit

Jan. 1

No entry







Dec.31

Compensation expense [(5,000 x $6) / 5]

$ 6,000



Share premium-share options


$ 6,000

02

(b) The journal entry(ies) for the first year of the plan assuming that rather than options, 700 shares of the restricted shares were granted at the beginning of 2017

(b)

Date

Account titles and Explanation

Debit

Credit

Jan. 1, 2017

Unearned compensation ($40 x 700)

$ 28,000



Share capital-Ordinary ($1 x 700)


$ 700


Share premium-ordinary


$ 27,300





Dec. 31, 2017

Compensation expense ($28,000 / 5)

$ 5,600



Unearned compensation


$ 5,600

03

 Step 3: (c) The market price of the Sarazan shares on the grant date was $45 per share. The requirements for (a) and (b) are repeated

(c)

Date

Account titles and Explanation

Debit

Credit

(Part a)

No change for part a unless the fair value of the options change







(Part b)




Jan. 1, 2017

Unearned compensation ($45 x 700)

$ 31,500



Share capital-Ordinary ($1 x 700)


$ 700


Share premium-ordinary


$ 30,800





Dec. 31, 2017

Compensation expense ($31,500/5)

$ 6,300



Unearned compensation


$ 6,300

04

(d) Employee share-purchase plans

At a point when the Employee Share-Purchase Plans (ESPP) shares are sold, the employer reports ESPP pay as wages in box 1 of the Form W-2. ESPPs have no portion for income taxes, and Social Securities and Medicare taxes don't have any significant bearing.

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Most popular questions from this chapter

DiCenta Corporation reported net income of \(270,000 in 2017 and had 50,000 shares of common stock outstanding throughout the year. Also outstanding all year were 5,000 shares of cumulative preferred stock, each convertible into 2 shares of common. The preferred stock pays an annual dividend of \)5 per share. DiCenta鈥檚 tax rate is 40%. Compute DiCenta鈥檚 2017 diluted earnings per share.

E16-28 (L05) (EPS with Warrants) Howat Corporation earned \(360,000 during a period when it had an average of 100,000 shares of common stock outstanding. The common stock sold at an average market price of \)15 per share during the period. Also outstanding were 15,000 warrants that could be exercised to purchase one share of common stock for $10 for each warrantexercised.

Instructions

(a) Are the warrants dilutive?

(b) Compute basic earnings per share.

(c) Compute diluted earnings per share.

E16-29 (L06) (Stock-Appreciation Rights) On December 31, 2013, Beckford Company issues 150,000 stock-appreciation rights to its officers entitling them to receive cash for the difference between the market price of its stock and a pre-established price of \(10. The fair value of the SARs is estimated to be \)4 per SAR on December 31, 2014; \(1 on December 31, 2015; \)10 on December 31, 2016; and $9 on December 31, 2017. The service period is 4 years, and the exercise period is 7 years.

Instructions

(a) Prepare a schedule that shows the amount of compensation expense allocable to each year affected by the stockappreciation rights plan.

(b) Prepare the entry at December 31, 2017, to record compensation expense, if any, in 2017.

(c) Prepare the entry on December 31, 2017, assuming that all 150,000 SARs are exercised.

(Stock-Based Compensation) Assume that Amazon.com has a stock-option plan for top management. Each

stock option represents the right to purchase a share of Amazon \(1 par value common stock in the future at a price equal to the

fair value of the stock at the date of the grant. Amazon has 5,000 stock options outstanding, which were granted at the beginning

of 2017. The following data relate to the option grant.

Exercise price for options \)40

Market price at grant date (January 1, 2017) \(40

Fair value of options at grant date (January 1, 2017) \)6

Service period 5 years

Instructions

(a) Prepare the journal entry(ies) for the first year of the stock-option plan.

(b) Prepare the journal entry(ies) for the first year of the plan assuming that, rather than options, 700 shares of restricted

stock were granted at the beginning of 2017.

(c) Now assume that the market price of Amazon stock on the grant date was $45 per share. Repeat the requirements for

(a) and (b).

(d) Amazon would like to implement an employee stock-purchase plan for rank-and-file employees, but it would like to

avoid recording expense related to this plan. Which of the following provisions must be in place for the plan to avoid

recording compensation expense?

(1) Substantially all employees may participate.

(2) The discount from market is small (less than 5%).

(3) The plan offers no substantive option feature.

(4) There is no preferred stock outstanding

(EPS with Convertible Bonds and Preferred Stock) On January 1, 2017, Crocker Company issued 10-year, \(2,000,000 face value, 6% bonds, at par. Each \)1,000 bond is convertible into 15 shares of Crocker common stock. Crocker鈥檚 net income in 2017 was \(300,000, and its tax rate was 40%. The company had 100,000 shares of common stock outstanding throughout 2017. None of the bonds were converted in 2017.

Instructions

(a) Compute diluted earnings per share for 2017.

(b) Compute diluted earnings per share for 2017, assuming the same facts as above, except that \)1,000,000 of 6% convertible preferred stock was issued instead of the bonds. Each $100 preferred share is convertible into 5 shares of Crocker common stock.
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