Question

Baltic Limited is a listed company based in California. On January 1, 2019, the company granted 10,000 share units to its vice president. Each share unit has a contractual service period of five years and a vesting condition based on market performance.

Each share unit is convertible into ordinary shares of Baltic Limited as follows:

• If the company’s share price increases by more than the Nasdaq Composite index over the five years, each share unit converts into 5 shares.
• If the company’s share price increases by less than or equal to the Nasdaq Composite index over the five years, each share unit converts into 1 share.

On the grant date, the company’s ordinary shares have a fair value of $10 per share.

Management believes the probability of the above scenarios occurring are 40% and 60%, and uses this information to calculate the fair value of the share unit award.

The company’s accountant has asked for your help to calculate compensation costs for these share units so that the appropriate journal entry can be recorded in 2019.

Ignore the effects of taxes.

Provide the journal entries and calculations to answer this question.

Answer 1

Journal entry for grant share unit to its vice president :-

DATE	EXPLANATION	$
JAN 1, 2019	Vice president	100,000
	Share capital	100,000
	( Being the amount for 10,000 share@10 per share)

According to the question, these share are convertible into ordinary share after 5 years. There are two condition for converting of share into ordinary share. Probability believe that there is 40% and 60% chance for both condition respectively. So, share will be convert as follows:-

1. If the company share price increase by more than the Nasdaq Composite index, each share unit convert into 5 ordinary share

Probability of 40% :- 10,000*40/100 = 4000 share unit

4000 share unit change into ordinary share = 4000*5

= 20000 ordinary share

2. If the company share price increase by less then or equal to Nasdaq Composite index, each share unit covert into 1 ordinary share.

Probability of 60% :- 10,000*60/100 = 6,000 share unit

6,000 share unit change into ordinary share = 6000*1

= 6000 ordinary share.

Journal entries for converting into ordinary share

EXPLANATION	$
Share capital	200,000
Ordinary share capital	200,000
(being the amount of covert 4000 share into ordinary share @each 5)
Share capital	60,000
Ordinary share capital	60,000
( Being the amount of covert 6000 share into ordinary share @ 1 each)