Question

On January 1, 2021, M.T. Toombe Mausoleum granted restricted stock units (RSUs) representing 60 million of its $1 par common shares to executives, subject to forfeiture if employment is terminated within three years. After the recipients of the RSUs satisfy the vesting requirement, the company will distribute the shares. The common shares had a market price of $15 per share on the grant date. At the date of grant, Toombe anticipated that 5% of the recipients would leave the firm prior to vesting. In 2022, 3% of the options are forfeited due to executive turnover. Toombe chooses the option not to estimate forfeitures.


Required:
1. Prepare the appropriate journal entry to record compensation expense on December 31, 2021. Ignore taxes.

• Record the compensation expense on December 1, 2021 for award of restricted stock units (RSUs) representing 60 million of its $1 par common shares to executives, subject to forfeiture if employment is terminated within three years. The common shares had a market price of $15 per share on the grant date.Toombe anticipated that 5% of the recipients would leave the firm prior to vesting.

2. Prepare the appropriate journal entry to record compensation expense on December 31, 2022. Ignore taxes.

• Record the compensation expense on December 1, 2022 for award of restricted stock units (RSUs) representing 60 million of its $1 par common shares to executives, subject to forfeiture if employment is terminated within three years. The common shares had a market price of $15 per share on the grant date.Toombe anticipated that 5% of the recipients would leave the firm prior to vesting.

Answer 1

Date	Particular	Dr in million	Cr in million
01-Jan-21	Although RSUs are granted on January 1, 2021, the cost of compensation package is distributed over the vesting period of 3 years; So, no journal entry is necessary
31-Dec-21	Compensation Expense	$                   285.00
	To Paid-in Capital - Restricted stock units		$                   285.00
	(To record compensation expense)
	Working Note:
	Options expected to vest
	=60 m shares x 95%
	= 57 m shares
	Expense allocated each year
	= (Total compensation cost of RSUs) / (Vesting period)
	= ($15 x 57 m shares )/3 years
	=$855m/ 3 years
	=$285 m
31-Dec-22	Compensation Expense	$                   267.00
	To Paid-in Capital - Restricted stock units		$                   267.00
	(To record compensation expense)
	Working Note:
	Options expected to vest
	3% of the options are forfeited
	= 57m shares - 3% OF 60 m shares
	= 55.2 m shares
	Expense allocated each year
	= (Total compensation cost of RSUs)*2/3 less Expense recognized earlier
	= [($15 x 55.2 shares *2/3) - $285 m]
	=[$552 m -$285m]
	=$267m

Alternatively 3% of the options are forfeited can be calculated as follows
Options expected to vest
3% of the options are forfeited
= 57m shares - 3% OF 57 m shares
= 55.29 m shares
Expense allocated each year
= (Total compensation cost of RSUs)*2/3 less Expense recognized earlier
= [($15 x 55.29 shares *2/3) - $285 m]
=[$552.9 m -$285m]
=$267.9m