Question

4. On January 1, 2020, Orr Co. established a stock appreciation rights plan for its executives. They could receive cash at any time during the next four years equal to the difference between the market price of the common stock and a preestablished price of $16 on 600,000 SARs. The market price is as follows: 12/31/20—$21; 12/31/21—$18; 12/31/22—$19; 12/31/23—$23. On December 31, 2022, 95,000 SARs are exercised, and the remaining SARs are exercised on December 31, 2023.

(a) Prepare a schedule that shows the amount of compensation expense for each of the four years starting with 2020.

(b) Prepare the journal entry at 12/31/21 to record compensation expense.

(c) Prepare the journal entry at 12/31/23 to record the exercise of the remaining SARs.

Answer 1

a) Schedule Showing Compensation Expense (Amounts in $)

Date	Market Price (A)	Pre Set Price (B)	Diff. B/w Price (C = A-B)	Value of SARs (D = C*No. of SARs)	Percent Accrued (E)	Accrued to Date (F = D*E)	Expense
12/31/20	21	16	5	3,000,000 (5*600,000)	25% (1/4 yrs)	750,000	750,000
12/31/21	18	16	2	1,200,000	50%	600,000	(150,000) (600,000-750,000)
12/31/22	19	16	3	1,800,000	75%	1,350,000	750,000 (1,350,000-600,000)
12/31/23	23	16	7	3,535,000 (7*505,000)	100%	3,535,000	2,185,000 (3,535,000-1,350,000)

2) Journal Entry to record Compensation Expense (Amounts in $)

Date	Account Titles and Explanation	Debit	Credit
12/31/21	Liability under Stock Appreciation Plan	150,000
	Compensation Expense		150,000
	(To record the compensation expense for 2021)

3) Journal Entry to record exercise of remaining SARs (Amounts in $)

Date	Account Titles and Explanation	Debit	Credit
12/31/23	Liability under Stock Appreciation Plan	3,535,000
	Cash		3,535,000
	(To record the exercise of remaining SARs)