Question

On January 1, 2019, Smith Inc. granted 6,500 Stock Appreciation Rights (SAR) to its executives, exercisable 2 years after grant date (unless employment is terminated) and prior to 8 years from grant date. The executives are to receive cash at exercise date for the excess of the market price over the pre-established base price of $25. The year-end fair values of each SAR were $3, 5.50, and $4.80 in 2019, 2020 and 2021 respectively. The executives exercise their SARs on 8/7/22 when the market price was $32 per share.

(i)    Prepare a properly labeled schedule to determine the amount of compensation expense for each of the four years.

(ii)   Prepare the journal entries at 12/31/19, 12/31/20, 12/31/21, and 8/7/22.

Answer 1

a)	A	B	C	D
Date	Fair value	Cumulative Compensation Recognizable	Percentage Accrued = 1/service period	Compensation Accrued to Date = B x C	Expense 2019	Expense 2020	Expense 2021	Expense 2022
December 31, 2019	$3.00	$19,500	33.33%	$6,500	$6,500
				$17,333
December 31, 2020	$5.50	$35,750	66.67%	$23,833		$17,333
				$216,167
December 31, 2021	$4.80	$240,000	100.00%	$240,000			$23,833
								$216,167
b)	Debit	Credit
2019
compensation expense	$6,500
Liability under SARs Plan		$6,500
2020
Compensation expense	$17,333
Liability under SARs Plan		$17,333
2021
Compensation expense	$23,833
Liability under SARs Plan		$23,833
2022
Compensation expense	$216,167
Liability under SARs Plan		$216,167