Question

As part of its stock-based compensation package, on January 1, 2018. Weldon Well Supplies granted restricted stock units (RSUS) representing 100,000 $1 par common shares. At exercise, holders of the RSUS are entitled to receive cash or stock equal in value to the market price of those shares at exercise. The RSUS cannot be exercised until the end of 2021 (vesting date) and expire at the end of 2023. The $1 par common shares have a market price of $6.6 per share on the grant date. The fair value at December 31, 2018, 2019, 2020 2021, and 2022, is $17.2. $13 2. $172, $11.2, and $132, respectively. All recipients are expected to remain employed through the vesting date. The RSUS are exercised on June 6, 2023, when the share price is $14.2, and executives choose to receive cash Required: 1. to 4. Prepare the appropriate journal entries. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.) View transaction list View journal entry worksheet Date General Journal Debit Credit No 1 January 01, 2018 No journal entry required 2 430,000 December 31, 2018 Compensation expense Liability-SAR plan 430,000 3 660,000 December 31, 2019 Compensation expense Liability-SAR plan 660.000 1 4 December 31, 2020 Compensation expense 200.000 < Prev 9 of 12 Next >

Answer 1

For passing journal entries, we need to calculated compensation expense at the end of each year which is shown as follows:-

1) The RSU can not be exercised until the end of 2021. Therefore the period for allocating compensation expense is 4 years (2018 to 2021).

On Jan 1, 2018 no journal entry required.

On Dec 31, 2018 the fair value is $17.2.

Compensation expense on Dec 31, 2018 = 100,000 Shares*$17.2*1/4 yrs = $430,000

2) Up to Dec 31, 2019, Compensation expense = 100,000 shares*$13.2*2/4 years = 660,000

Compensation expense for 2019 = Total compensation upto 2019 - Compensation expense for 2018

= $660,000 - $430,000 = $230,000

3) Up to Dec 31, 2020, Compensation expense = 100,000 shares*$17.2*3/4 years = 1,290,000

Compensation expense for 2020 = Compensation upto 2020 - Compensation expense for 2019 and 2018

= $1,290,000 - $230,000 - $430,000 = $630,000

4) Up to Dec 31, 2021, Compensation expense = 100,000 shares*$11.2*4/4 years = 1,120,000

Compensation expense for 2021 = Compensation upto 2021 - Compensation expense for 2020,2019 and 2018

= $1,120,000 - $630,000 - $230,000 - $430,000 = -170,000

Therefore $170,000 needs to be reversed on Dec 31, 2021.

5) On Dec 31, 2022, option remain unexercised, therefore journal entry will be required on this date.

On Dec 31, 2022 = (100,000*$13.2*4/4) - 1,120,000 = $200,000

6) Option exercised on June 6, 2023 when share price is $14.2.

We have debited compensation expense at $13.2 per share hence $1 per share need to be debited to compensation expense on June 6, 2023

The required journal entries are shown as follows:-  

Journal Entries (Amounts in $)

No	Date	General Journal	Debit	Credit
1	Jan 1, 2018	No Journal Entry required
2	Dec 31, 2018	Compensation Expense	430,000
		Liability-SAR Plan		430,000
		(To record the compensation expense)
3	Dec 31, 2019	Compensation Expense	230,000
		Liability-SAR Plan		230,000
		(To record the compensation expense)
4	Dec 31, 2020	Compensation Expense	630,000
		Liability-SAR Plan		630,000
		(To record the compensation expense)
5	Dec 31, 2021	Liability-SAR Plan	170,000
		Compensation Expense		170,000
		(To reverse the compensation expense)
6	Dec 31, 2022	Compensation Expense	200,000
		Liability-SAR Plan		200,000
		(To record the compensation expense)
7	June 6, 2023	Compensation Expense [(14.2-13.2)*100,000]	100,000
		Liability-SAR Plan		100,000
		(To record the compensation expense)
8	June 6, 2023	Liability-SAR Plan (100,000*$14.2)	1,420,000
		Cash		1,420,000
		(To record the cash paid for options)