Question

Financial Accounting Research Assignment

Acorn Limited is a listed company based in Vermont. On January 1, 2018, the company granted 1,000 share units to its CFO. Each share unit has a contractual service period of three years and a vesting condition based on the details below. At the end of 2020, each share unit is convertible into 100 common shares of Acorn Limited if both of the following criteria are met:

2018-2020 Accumulated company net income is greater than $5 million.

2018-2020 Stock price increase is greater than 25%.

On the grant date, the company’s common shares had a fair value of $6 per share and the company was expected to meet both of the criteria above.

During 2018 and 2019, the company was expected to meet both of the criteria above. However, during 2020 the company’s stock price decreased and the company did not meet the stock price increase criteria at the end of the year.

The company’s accountant has asked for your help to check the compensation costs recorded for these share units during 2018-2019 and record the appropriate journal entry at the end of 2020.

Ignore the effects of taxes.

The answer should have these parts:

1.The first part of your report is the Question. In this section, you must identify the accounting problem. Be brief and precise. Try to write your question in one sentence. This section should not exceed two sentences.

2. The second part of your report is the Solution. In this section, you must clearly communicate your proposed solution to the accounting problem you identified in section one. Explain and lay out all of the steps involved in your solution. This will usually involve calculations and journal entries. Be sure to adequately answer the question from part one, including calculations and working. Your solution should be clear and understandable such that the reader does not have to read the authoritative literature for himself/herself. Please use in-text citations!

3. The third part of your report is the Authoritative Citation(s). In this section, you must list the titles of the citation(s) from the professional accounting literature upon which you based your solution.

Answer 1

PART-1

IN THE ABOVE PARA, THE QUESTION IS REGARDING CALCULATION AND ACCOUNTING OF EMPLOYEE STOCK OPTION PLAN.

PART-2

NO .OF UNITS ALLOTTED TO CFO: 1000

AFTER 3 YEARS 1 UNIT WILL CONVERT INTO 100 SHARES.

I.E. TOTAL NO OF SHARES TO BE ALLOTED TO CFO = 1000 UNITS *100 SHARES PER UNIT

= 100000 SHARES

FAIR VALUE OF PER SHARE: $6 PER SHARE

TOTAL COST OF SHARE ALLOTMENT TO COMPANY = NO OF SHARES * FAIR VALUE PER SHARE

= 100000*6= $600000

THE COMPANY WILL ALLOT SHARE TO CFO AFTER 3 YEARS FROM TODAY,

IF TWO CONDITIONS GIVEN IN THE QUESTION WILL MEET,

SO AS PER ACCOUNTING STANDARD, THE COMPANY SHOULD AMORTISE THE WHOLE EXPENSE IN THE NO OF YEARS IT EXPECT THAT THE CRITERIA WILL MEET. IN THE CURRENT QUEATION, THE COMPANY IS EXPECTING THAT THE CRITERIA WILL MEET EVERY YEAR FOR 3 YEARS, SO COMPANY SHOULD AMORTISE THE WHOLE EXPENSE INTO 3 YAERS.

I.E. $600000/3= $200000 PER YEAR.

1) AT THE END OF IST YEAR I.E. 2018

THE COMPANY MET THE BOTH CRITERIA AND EXPECTING TO MEET FOR FURTHUR TWO YEARS, SO THE COMPANY SHOULD AMORTISE $200000 IN ITS BOOKS OF ACCOUNTS BY PASSING FOLLOWING JOUNAL ENTRIES:

DR	EMPLOYEE COMPENSATION A/C	200000
CR	TO SHARE BASED PAYMENT RESERVE A/C		200000
	( BEING $200000 AMORTISED AS EXPENSE OF 2018)
DR	EMPLOYEE BENEFIT EXPENSE A/C	200000
CR	TO EMPLOYEE COMPENSATION A/C		200000
	(BEING EXPENSE TRANSFERRED TO EMPLOYEE BENEFIT EXPENSE A/C)

1) AT THE END OF 2ND YEAR I.E. 2019

THE COMPANY MET THE BOTH CRITERIA AND EXPECTING TO MEET FOR FURTHUR TWO YEARS, SO THE COMPANY SHOULD AMORTISE $200000 IN ITS BOOKS OF ACCOUNTS BY PASSING FOLLOWING JOUNAL ENTRIES:

DR	EMPLOYEE COMPENSATION A/C	200000
CR	TO SHARE BASED PAYMENT RESERVE A/C		200000
	( BEING $200000 AMORTISED AS EXPENSE OF 2019)
DR	EMPLOYEE BENEFIT EXPENSE A/C	200000
CR	TO EMPLOYEE COMPENSATION A/C		200000
	(BEING EXPENSE TRANSFERRED TO EMPLOYEE BENEFIT EXPENSE A/C)

1) AT THE END OF 3RD YEAR I.E. 2020

THE COMPANY DID NOT MEET THE BOTH CRITERIA SO THE COMPANY NEED NOT TO FURTHUR AMORTISE $200000 IN ITS BOOKS OF ACCOUNTS BECAUSE THE EMPLOYEE STOCK OPTION PLAN LAPSE DUE TO NON FULFILMENT OF CRITERIA. THE COMPANY WILL HAVE TO REVERSE THE EARLIER AMORTISED EXPENSE OF $400000 BY PASSING FOLLOWING JOURNAL ENTRY:

DR	SHARE BASED PAYMENT RESERVE A/C	400000
CR	TO GENERAL RESERVE A/C		400000
	( BEING AMORTISED EXPENSE REVERSED DUE TO LAPSING OF EMPLOYEE STOCK OPTION PLAN)