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Chapter 16: Q30E (page 881)

E16-30 (L06) (Stock-Appreciation Rights) Capulet Company establishes a stock-appreciation rights program that entitles its new president Ben Davis to receive cash for the difference between the market price of the stock and a pre-established price of \(30 (also market price) on December 31, 2013, on 30,000 SARs. The date of grant is December 31, 2013, and the required employment (service) period is 4 years. President Davis exercises all of the SARs in 2019. The fair value of the SARs is estimated to be \)6 per SAR on December 31, 2014; \(9 on December 31, 2015; \)15 on December 31, 2016; \(6 on December 31, 2017; and \)18 on December 31, 2018.

Instructions

(a) Prepare a 5-year (2014鈥�2018) schedule of compensation expense pertaining to the 30,000 SARs granted president Davis.

(b) Prepare the journal entry for compensation expense in 2014, 2017, and 2018 relative to the 30,000 SARs.

Short Answer

Expert verified

The compensation expense for the year 2018 is $360,000.

Step by step solution

01

Schedule of compensation expense

Date

Fair Value

Cumulative compensation recognizable

Percentage Accrued

Compensation accrued to date

Expense 2014

Expense 2015

Expense 2016

Expense 2017

Expense 2018

December 31, 2014

$6

$180,000

25%

$45,000

$45,000

$90,000

December 31, 2015

$9

$270,000

50%

$135,000

$90,000

$202,500

December 31, 2016

$15

$450,000

75%

$337,500

$202,500

$157,500

December 31, 2017

$6

$180,000

100%

$180,000

($157,500)

$360,000

December 31, 2018

$18

$540,000

-

$540,000

$360,000

02

Journal entries for compensation expense

Date

Particulars

Debit

Credit

2014

Compensation Expense

$45,000

Liability Under Stock Appreciation Plan

$45,000

(Being entry for the compensation expense)

2017

Liability Under Stock Appreciation Plan

$157,500

Compensation Expense

$157,500

(Being entry for the compensation expense)

2018

Compensation Expense

$360,000

Liability Under Stock Appreciation Plan

$360,000

(Being entry for the compensation expense)

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Most popular questions from this chapter

Which of the following statements is correct?

a) IFRS separates the proceeds of a convertible bond between debt and equity by determining the fair value of the debt component before the equity component.

b) Both IFRS and GAAP assume that when there is a choice of settlement of an option for cash or shares, share settlement is assumed.

c) IFRS separates the proceeds of a convertible bond between debt and equity, based on relative fair values.

d) Both GAAP and IFRS separate the proceeds of convertible bonds between debt and equity.

Discuss the similarities and the differences between convertible debt and debt issued with stock warrants.

Angela Corporation issues 2,000 convertible bonds at January 1, 2016. The bonds have a 3-year life, and are issued at par with a face value of \(1,000 per bond, giving total proceeds of \)2,000,000. Interest is payable annually at 6%. Each bond is convertible into 250 ordinary shares (par value of $1). When the bonds are issued, the market rate of interest for similar debt without the conversion option is 8%.

Instructions

(a) Compute the liability and equity component of the convertible bond on January 1, 2016.

(b) Prepare the journal entry to record the issuance of the convertible bond on January 1, 2016.

(c) Prepare the journal entry to record the repurchase of the convertible bond for cash at January 1, 2019, its maturity date.

The information below pertains to Barkley Company for 2018.

Net income for the year \(1,200,000

7% convertible bonds issued at par (\)1,000 per bond); each bond is convertible into

30 shares of common stock 2,000,000

6% convertible, cumulative preferred stock, \(100 par value; each share is convertible

into 3 shares of common stock 4,000,000

Common stock, \)10 par value 6,000,000

Tax rate for 2018 40%

Average market price of common stock \(25 per share

There were no changes during 2018 in the number of common shares, preferred shares, or convertible bonds outstanding. There is no treasury stock. The company also has common stock options (granted in a prior year) to purchase 75,000 shares of common stock at \)20 per share.

Instructions

(a) Compute basic earnings per share for 2018.

(b) Compute diluted earnings per share for 2018

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.
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