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xercise 19-30 (Algo) Stock appreciation rights; cash settlement (Appendix 19B) As part of its stock-based compensation...

xercise 19-30 (Algo) Stock appreciation rights; cash settlement (Appendix 19B)

As part of its stock-based compensation package, International Electronics granted 14 million stock appreciation rights (SARs) to top officers on January 1, 2021. At exercise, holders of the SARs are entitled to receive cash or 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 2024 (vesting date) and expire at the end of 2026. The $1 par common shares have a market price of $50 per share on the grant date. The fair value of the SARs, estimated by an appropriate option pricing model, is $4.50 per SAR at January 1, 2021. The fair value re-estimated at December 31, 2021, 2022, 2023, 2024, and 2025, is $5.50, $4.50, $6, $1.40, and $4.50, respectively. All recipients are expected to remain employed through the vesting date.

Required:

1. to 3. Prepare the appropriate journal entries pertaining to the SARs on January 1, 2021 and December 31, 2021–December 31, 2024. The SARs remain unexercised on December 31, 2025, prepare the appropriate entry.
4. The SARs are exercised on June 6, 2026, when the share price is $60, and executives choose to receive the market price appreciation in cash. Prepare the appropriate journal entry(s) on that date.

Solutions

Expert Solution

Answer:

Requirement 1

The SARs are considered to be equity because IE will settle in shares of IE stock at exercise.

January 1, 2021

No entry

Calculate total compensation expense:

$ 4.5 estimated fair value per SAR
x 14 million SARs granted
= $63 million total compensation


The total compensation is allocated to expense over the four-year service (vesting) period: 2021 – 2024
$63 million ÷ 4 years = $15.75 million per year

Requirement 2

December 31, 2021, 2022, 2023, 2024 ($ in millions)

Compensation expense ($63 million÷ 4 years) 15.75   
Paid-in capital—SAR plan 15.75

Requirement 3

The total compensation is measured once — at the grant date — and is not re-measured subsequently.

Requirement 4

June 6, 2026

Paid-in capital—SAR plan (account balance) 63

Common stock ($1 par per share x [$140 million* ÷$60]) 2.33

Paid-in capital—in excess of par (to balance) 60.67

*$60 – $50 = $10 appreciation per share times 14 million units = $140 million

ekkarill92 answered 2 years ago
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