Question

200 Goo Compound Instruments ncludes two components cial instrument Chapter 15 Assignment Nams Question 1 On January 1, 2021 Taffy Inc. granted 210,000 stock appreciation rights (SAR) to its executives. Each SAR entitled its holder to receive cash equal to the difference between the market price of the common share and the benchmark price of $16. The SARs vested after three years and expired on Dec 31, 2026. On January 1, 2024, 100,000 SARs are exercised. The market price of the shares remained at $20. On January 1, 2025, 50,000 SARS are exercised. The market price of the shares remained at $22. The remaining SARs expired. 16-20= 4, TOOOO Pertinent stock-related data are listed below: Fair value each SAR Market price of share $16 $10 $21 $18 January 1, 2021 December 31, 2021 December 31, 2022 December 31, 2023 December 31, 2024 December 31, 2025 December 31, 2026 $7 $20 $15 $14 Required: a. Prepare the journal entry at December 31, 2021, to record compensation expense. Date Debit Credit Explanation/Account Competation Expense Lone teoo - Competitie latte b. Prepare the journal entry at December 31, 2022, to record compensation expense. Date Explanation/Account Debit Credit C. Prepare the journal entry at December 31, 2023, to record compensation expense. Date Explanation/Account Debit Credit

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Answer 1

Sol Information Given in the question Issue date of Stock Appreciation Rights (SAR) Vesting period Exercise Date Exercise Period Exercise Price SAR issued 1st Jan 2021 3Years 1st Jan 2024 1st Jan 2024 to 31st Dec 2026 $ 210,000 16 Fair Value of SAR 31st Dec 2021 31st Dec 2022 31st Dec 2023 Market Price 1st Jan 2024 31st Dec 2024 1st Jan 2025 31st Dec 2025 31st Dec 2026

$ 10 Expense to be reocgnised explanation For the year 2021 Fair Value as on 31st Dec 2021 No of Rights Total Value of SAR (210000*10) This value to be expensed of over a period of vesting (i.e Three Years) Hence Expense for the Year 2021 (2,100,000/3) 210,000 2,100,000 $ $ 700,000 For the year 2022 Fair Value as on 31st Dec 2022 No of Rights 210,000 Total Value of SAR (210000*6) Less : Expense already recognised in 2021 This value to be expensed of over a balance vesting period (i.e two Years) $ 1,260,000 $ 700,000 $ 560,000 Hence Expense for the Year 2021 (560000/2) $ 280,000 For the year 2023 Fair Value as on 31st Dec 2023 No of Rights $ 210,000 Total Value of SAR (210000*7) $ 1,470,000

$ Less : Expense already recognised in 2021 Less : Expense already recognised in 2022 This value to be expensed of over a balance vesting period (i.e 2023) 700,000 280,000 770,000 $ Hence Expense for the Year 2021 (560000/2) $ 385,000 Total Liability created till 31st Dec 2023 $ 1,365,000 100,000 For the year 2024 No of rights Exercised Market Value as on date of exercise (1st Jan 2024) Exercise price Difference of price will paid to redeem 100,000 rights $ 400,000 100,000 22 No of balance rights available for Exercise Market Value as on 31st Dec 2024 SAR Value (i.e Market value - Exercise value) Balance SARs (not excercised) $ $ 110,000

Value of liability to be created Liability Existing (after exercise of 100000 SARS)-Laibility created less Discharged liability i.e =1,365,000-400000 Hence Liabilty to the extent $305,000 reduced by dereocgnition of expense $ $ $ 660,000 965,000 (305,000) 50,000 For the year 2025 No of rights Exercised Market Value as on date of exercise (1st Jan 2025) Exercise price Difference of price will paid to redeem 50000 rights 22 16 300,000 No of balance rights available for Exercise (210000-100000-50000) 60,000 Market Value as on 31st Dec 2025 $ 15 Since Market price on Dec 2025 is less than $16, No option will be excercised according no liabilty as on Dec 2025 $ Liability Existing (after exercise of 150000 SARs)-Laibility created less Discharged liability Created till Dec 2023 Less: Discharged liability (400000+300000) Less: Derecognised Liability balance of liability a/c after exercise 150000 SARS Value of liability to be created 1,365,000 700,000 305,000 360,000 $ Hence Liabilty to the extent $360,000 reduced by dereocgnition of expense

Credit Debit 700,000 $ Date Journal Entry 31st Dec 2021 Employee Compensation Expense a/c TO SAR Liability -Long term a/c (Being SAR fair value as on 31st Dec $10 recognised as expenses) $ 700,000 $ 280,000 31st Dec 2022 Employee Compensation Expense a/c TO SAR Liability -Long term a/c (Being SAR fair value as on 31st Dec $6 recognised as expenses) $ 280,000 $ 385,000 31st Dec 2023 Employee Compensation Expense a/c TO SAR Liability -Long term a/c (Being SAR fair value as on 31st Dec $7 recognised as expenses) $ 385,000 $ 400,000 1st Jan 2024 SAR Liability -Long term a/c To Cash a/c (Being Exercise of 100000 SARS) $ 400,000 $ 305,000 31st Dec 2024 SAR Liability -Long term a/c To Employee Compensation Expense a/c (Derecognition of Expense) $ 305,000

$ 300,000 1st Jan 2025 SAR Liability -Long term a/c To Cash a/c (Being Exercise of 50000 SARS) $ 300,000 $ 360,000 31st Dec 2025 SAR Liability - Long term a/c To Employee Compensation Expense a/c (Derecognition of Expense) $360,000 31st Dec 2026 SAR Liability -Long term a/c To Employee Compensation Expense a/c (No liabilty to be created as SAR were expired)