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Chapter 16: Q29E (page 881)

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.

Short Answer

Expert verified

a. Compensation Expenses are $150,000, $75000, $1,125,000 and $1,350,000 for the year ended 2014, 2015, 2016 and 2017 respectively.

b. Liability under the stock appreciation plan is recorded at$225,000on December 31, 2017

c.The executives receives$1,35,000

Step by step solution

01

Meaning of Stock Appreciation Rights

Stock appreciation rights refer to the rights in which the executives have the right to receive compensation equal to the amount of stock appreciation.

02

Schedule showing the compensation expenses

Date

Fair Value

Cumulative compensation

% Accrued

Total

Balance

Year Expense

31.12.2014

$4

$600,000

25%

$150,000

-

2014

31.12.2015

$1

$150,000

50%

$75,000

($75,000)

2015

31.12.2016

$10

$1,500,000

75%

$1,125,000

$1,050,000

2016

31.12.2017

$9

$1,350,000

100%

$1,350,000

$225,000

2017

03

Step 3:Journal entry on December 31, 2014

Date

Accounts and Explanation

Debit ($)

Credit ($)

Dec 31, 2017

Liability under stock Appreciation Plan

1,350,000

Cash

1,350,000

(To record the realization of cash exercised)

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Most popular questions from this chapter

(EPS with Options, Various Situations) Venzuela Company鈥檚 net income for 2017 is \(50,000. The only potentially dilutive securities outstanding were 1,000 options issued during 2016, each exercisable for one share at \)6. None has been exercised, and 10,000 shares of common were outstanding during 2017. The average market price of Venzuela鈥檚 stock during 2017 was \(20.

Instructions

(a) Compute diluted earnings per share. (Round to nearest cent.)

(b) Assume the same facts as those assumed for part (a), except that the 1,000 options were issued on October 1, 2017 (rather than in 2016). The average market price during the last 3 months of 2017 was \)20.

Discuss why options and warrants may be considered potentially dilutive common shares for the computation of diluted earnings per share.

(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.

(L04) (EPS: Simple Capital Structure) Ace Company had 200,000 shares of common stock outstanding on December 31, 2018. During the year 2019, the company issued 8,000 shares on May 1 and retired 14,000 shares on October 31. For the year 2019, Ace Company reported net income of \(249,690 after a loss from discontinued operations of \)40,600 (net of tax).

Instructions

What earnings per share data should be reported at the bottom of its income statement?

Earnings per share can affect market prices of common stock. Can market prices affect earnings per share? Explain.
See all solutions

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