Question

PHN Foods granted 36 million of its no par common shares to executives, subject to forfeiture if employment is terminated within three years. The common shares have a market price of $13 per share on January 1, 2017, the grant date.

Required:

1. What journal entry will PHN Foods prepare to record executive compensation regarding these restricted shares at December 31, 2017 and December 31, 2018?
2. When calculating diluted EPS at December 31, 2018, what will be the net increase in the denominator of the EPS fraction if the market price of the common shares averages $13 per share during 2018?

Answer 1

Answer:

Journal entries
Date	Account Title	debit($)million	credit($)million
31-12-2017	Compensation expenses	156
	paid in capital -restricted stock		156
	(to record compensation exp)
31-12-2018	Compensation expenses	156
	paid in capital -restricted stock		156
	(to record compensation exp)
Calculation of compensation exp
fair market value per share*no of share awarded
13*36 = $468 million
allocation of exp = total compensation cost/vesting period
allocation of exp = 468/ 3 yr
allocation of exp = $156 million
2) calculation of no of share bought back if market price is 13
no of share = expenses allocated in 2016/avg market price per share
156 million /13 = 12 million
Dilluted EPS = no adjustment to the numerator/36 million-12 million share
24 million share
hence 36 million share will bought back 12 million share & increase the denominator
or dilluted EPS 24 million shares