Question

As part of its stock-based compensation package, International Electronics granted 28 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 $47 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-a. Will the SARs be reported as debt or equity?
1-b to 4. Prepare the appropriate journal entries pertaining to the SARs on January 1, 2018 and December 31, 2018–December 31, 2021. Assuming the SARs remain unexercised on December 31, 2022, prepare the appropriate entry. Prepare the entry when the SARs are exercised on June 6, 2023, when the share price is $50.

Answer 1

SARs are reported as debt. Cost Associated with SARs plan not settled until expired or payout, So it is liabilities for Company.
Journal Entries
All Amount In millions $
Date	general Journal	Debit	Credit
January 1, 2018	No entry
December 31, 2018	Compensation expense	28
	Liability - stock appreciation rights		28
	(To record Compensation expense For SARs Plan.)
December 31, 2019	Compensation expense	14
	Liability - stock appreciation rights		14
	(To record Compensation expense For SARs Plan.)
December 31, 2020	Compensation expense	42
	Liability - stock appreciation rights		42
	(To record Compensation expense For SARs Plan.)
December 31, 2021	Liability - stock appreciation rights	14
	Compensation expense		14
	(To record Liability of SARs write off For SARs Plan.)
December 31, 2022	Compensation expense	14
	Liability - stock appreciation rights		14
	(To record Compensation expense For SARs Plan.)
December 31, 2023	Liability - stock appreciation rights	28
	Compensation expense		28
	(To Adjust at Fair value.) (50-46=4) (4*28=112 ) (112-84)
December 31, 2023	Liability - stock appreciation rights	112
	Cash		112
	(To record SARs Plan exercised and amount paid.)

December 31, 2018
The SARs cannot be exercised until the end of 2021. It means Expense Divided over 4 years.
SAR Plan Value (28*4)	112
Compensation Expense (112*1/4 years)	28
December 31, 2019
SAR Plan Value (28*3)	84
Compensation Expense till the date (84*2/4 years)	42
Less: Already recorded as expense	-28
Compensation Expense	14
December 31, 2020
SAR Plan Value (28*4)	112
Compensation Expense till the date (112*3/4 years)	84
Less: Already recorded as expense	-42
Compensation Expense	42
December 31, 2021
SAR Plan Value (28*2.5)	70
Compensation Expense till the date (70*4/4 years)	70
Less: Already recorded as expense	-84
Compensation Expense (it means Expense Credited.)	-14
December 31, 2022
SAR Plan Value (28*3)	84
Less: Already recorded as expense	-70
Compensation Expense	14