Question

As part of its stock-based compensation package, International Electronics granted 24 million stock appreciation rights (SARs) to top officers on January 1, 2018. At exercise, holders of the SARs are entitled to receive stock equal in value to the excess of the market price at exercise over the share price at the date of grant. The SARs 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 $46 per share on the grant date. The fair value of the SARs, estimated by an appropriate option pricing model, is $3 per SAR at January 1, 2018. The fair value reestimated at December 31, 2018, 2019, 2020, 2021, and 2022, is $4, $3, $4, $2.50, and $3, respectively. All recipients are expected to remain employed through the vesting date.

Required:
1. Prepare the appropriate journal entry to record the award of SARs on January 1, 2018. Will the SARs be reported as debt or equity?
2. Prepare the appropriate journal entries pertaining to the SARs on December 31, 2018–December 31, 2021.
3. The SARs remain unexercised on December 31, 2022. Prepare the appropriate journal entry on that date.
4. The SARs are exercised on June 6, 2023, when the share price is $50. Prepare the appropriate journal entry(s) on that date.

Answer 1

1. January 1, 2018

No Journal entry

The SARs will be reported as EQUITY

2. December 31, 2018

Dr Compensation expense $18,000,000

Cr Paid in capital SAR plan $18,000,000

December 31, 2019

Dr Compensation expense $18,000,000

Cr Paid in capital SAR plan $18,000,000

December 31, 2020

Dr Compensation expense $18,000,000

Cr Paid in capital SAR plan $18,000,000

December 31, 2023

Dr Compensation expense $18,000,000

Cr Paid in capital SAR plan $18,000,000

3. December 31, 2022

No Journal entry

4. June 6, 2023

Dr Paid in capital SAR plan $72,000,000

Cr Common stock $1,920,000

Cr Paid in capital in excess of Par $70,080,000

Step-by-step explanation:

1. Preparation of the appropriate journal entry to record the award of SARs on January 1, 2018.

January 1, 2018

No Journal entry

Based on the information The SARs will be reported as EQUITY reason been that IE which full meaning is INTERNATIONAL ELECTRONICS

will tend to settle in shares of the INTERNATIONAL ELECTRONICS stock during exercise.

2. Preparation of the appropriate journal entries pertaining to the SARs on December 31, 2018–December 31, 2021.

December 31, 2018

Dr Compensation expense $18,000,000

Cr Paid in capital SAR plan $18,000,000

(3*$24 million/4)

December 31, 2019

Dr Compensation expense $18,000,000

Cr Paid in capital SAR plan $18,000,000

(3*$24 million/4)

December 31, 2020

Dr Compensation expense $18,000,000

Cr Paid in capital SAR plan $18,000,000

(3*$24 million/4)

December 31, 2023

Dr Compensation expense $18,000,000

Cr Paid in capital SAR plan $18,000,000

(3*$24 million/4)

3. Preparation of the appropriate journal entry on that date.

December 31, 2022

No Journal entry

4. Preparation of the appropriate journal entry(s) on June 6, 2023

June 6, 2023

Dr Paid in capital SAR plan $72,000,000

(3*$24 million)

Cr Common stock $1,920,000

[($50-$46)*$24,0000/$50]

Cr Paid in capital in excess of Par $70,080,000

($72,000,000-$1,920,000)