stock-based employee compensation - examples · web viewstock based award with a performance...
TRANSCRIPT
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. 12 mos. 12 mos. 12 mos. 6 mos.
Grant date 12/10 12/11 12/12 12/31/13 7/1/14 12/31/09
Service Period 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
Total Compensation Pct Journal Entry
Debit Credit
12/31/09 $20 $20 0% None
12/31/10 $25 $20Compensation ExpenseShare-based compensation liabilityDeferred tax assetDeferred tax benefit (I/S)
12/31/11Vesting Date
$19 $20Compensation ExpenseShare-based compensation liabilityDeferred tax assetDeferred tax benefit (I/S)
12/31/12 $30 $20Compensation ExpenseShare-based compensation liabilityDeferred tax assetDeferred tax benefit (I/S)
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Example 1A, continued
Date Fair Value
Base Price
Total Compensation Pct Journal Entry
Debit Credit
12/31/13 $32 $20Compensation ExpenseShare-based compensation liabilityDeferred tax assetDeferred tax benefit (I/S)
3/1/14 $31 $20Compensation 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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Example #1B - Stock Appreciation Rights (SARS)
Share-based Compensation Classified as LiabilityPublicly-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. 12 mos. 12 mos. 12 mos. 6 mos.
Grant date 12/31/10 12/31/11 12/31/12 12/31/13 7/1/14 12/31/09
Service Period 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).
Date Mkt Value
FV SARS
Total Compensation Pct Journal Entry
Debit Credit
12/31/09 $20 $10 0% None
12/31/10 $25 $13Compensation ExpenseShare-based compensation liabilityDeferred tax assetDeferred tax benefit (I/S)
12/31/11Vesting Date
$19 $5Compensation ExpenseShare-based compensation liabilityDeferred tax assetDeferred tax benefit (I/S)
12/31/12 $30 $15Compensation ExpenseShare-based compensation liabilityDeferred tax assetDeferred tax benefit (I/S)
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Example 1B, continued
Date Mkt Value
FV SARS
Total Compensation Pct Journal Entry
Debit Credit
12/31/13 $32 $12.75Compensation ExpenseShare-based compensation liabilityDeferred tax assetDeferred tax benefit (I/S)
3/1/14 $31 $11Compensation 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 EntityCash 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. 12 mos. 12 mos. 12 mos. 6 mos.
Grant date 12/31/10 12/31/11 12/31/12 12/31/13 7/1/14 12/31/09
Service Period 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
FV SARS
Total Compensation Pct Journal Entry
Debit Credit
12/31/09 $20 $10 0% None
12/31/10 $25Compensation ExpenseAPIC - SARSDeferred tax assetDeferred tax benefit (I/S)
12/31/11Vesting Date
$19Compensation ExpenseAPIC - SARSDeferred tax assetDeferred tax benefit (I/S)
12/31/12 $30 No adjustment to Compensation Expense after vesting
12/31/13 $32 No adjustment to Compensation Expense after vesting
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Example 1C, continued
Date FV Stock
FV SARS
Total Compensation Pct Journal Entry
Debit Credit
3/1/14Settlement Date
$31
Base Price = $20
$10APIC - SARS
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 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.
2. 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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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. 12 mos. 6 mos.
Grant date 12/31/11 1231/12 7/1/13 12/31/10
Service Period 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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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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Example 2, continued
The actual tax deduction will be $10 per share or $850,000 * .34 = $289,000We 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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Earnings Per Share ComputationsOptions 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 Net incomeOptions Outstanding at
end of year
Weighted Average Shares of Common Stock Outstanding
Average market price
Tax rate
2010 $970,000 100,000 250,000 $24.32 34%2011 $1,000,000 95,000 250,000 $24.95 34%2012 $1,200,000 90,000 300,000 $26.82 34%2013 $1,300,000 0 at 12/31
85,000 exercised at 4/15,000 expired on 7/1
To be computed, beginning of year =
325,000
For 1/1 to 4/1 $30.25For 1/1 to 7/1 $27.56
34%
We’ll come back and work on doing earnings per share for Example 2 later
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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. 12 mos. 12 mos. 12 mos. 6 mos.
Grant date 12/31/12 12/31/13 12/31/14 12/31/15 7/1/16 12/31/11
Implied Service Period Exercise Period
12/31/11 Market Price PPP stock = $30Options expected to be outstanding at 12/31/14 =
12/31/12 Market Price PPP stock = $32Options expected to be outstanding at 12/31/14 =
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 = $37Options expected to be outstanding at 12/31/14 =
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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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HOMEWORK BEquity Awards with Service or Performance Conditions
1. 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.
2. 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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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 2 3 4 5 6 7 8 9 10$57 $60 $62 $56 $65
12/24/11 12/31/11 12 13 14 15 16 17 18 19 20 21Grant date Measurement date
Exercise Period
Implied Service Period
Vesting date Fair value Number of Shares Expected to Vest
Total Compensation to
Recognize
Market Price at Vesting
Shares that Actually Vest
12/31/17 $44.00 6,000 * .996 = 5,649 248,556 $57.00 6,000
12/31/18 $45.00 6,000 * .997 = 5,592 251,640 $60.00 6,000
12/31/19 $46.00 6,000 * .998 = 5,536 254,656 $62.00 5,600
12/31/20 $47.00 6,000 * .999 = 5,481 257,607 $56.00 5,600
12/31/21 $48.00 6,000 * .9910 = 5,426 260,448 $65.00 5,000
27,684 1,272,907 28,200Note 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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Example 4, continued12/31/12 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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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 in-substance 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 1 2 3 4 5 Compensation to Recognize during Year
2012 $ 11,298 $ 11,184 $ 10,380 $ 10,353 $ 10,852 $ 54,067 2013 $ 11,298 $ 11,184 $ 10,380 $ 10,353 $ 10,852 $ 54,067 2014 $ 11,298 $ 11,184 $ 10,380 $ 10,353 $ 10,852 $ 54,067 2015 $ 11,298 $ 11,184 $ 10,380 $ 10,353 $ 10,852 $ 54,067 2016 $ 11,298 $ 11,184 $ 10,380 $ 10,353 $ 10,852 $ 54,067 2017 $ 11,298 $ 11,184 $ 10,380 $ 10,353 $ 10,852 $ 54,067 2018 $ 11,184 $ 10,380 $ 10,353 $ 10,852 $ 42,769 2019 $ 10,380 $ 10,353 $ 10,852 $ 31,585 2020 $ 10,353 $ 10,852 $ 21,205 2021 $ 10,852 $ 10,852
Total $ 67,788 $ 78,288 $ 83,040 $ 93,177 $ 108,520 $ 430,813
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HOMEWORK CGraded 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 Fair Value Percentage Vested
Expiration Date(all tranches)
March 1, 2012 $9 25%December 31, 2020(or within 3 months of termination)
March 1, 2013 $13 25%March 1, 2014 $18 25%March 1, 2015 $22 25%
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 Market Value of Common Stock at Vesting Date
3/1/2012 98,000 $48.003/1/2013 92,000 $54.253/1/2014 82,000 $49.003/1/2015 80,000 $52.00
Exercise Date Number of Options Exercised Market Value of Common Stock at Exercise Date
12/5/2014 12,000 $50.002/13/2015 18,000 $55.0012/10/2015 54,000 $55.5012/3/2019 268,000 $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, first-out 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
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