Question

ABC grants 1,000 new shares of $5 par common stock to each of five executives on January 1, 2021. The 5,000 shares have a total fair value of $87,000 at grant. The shares will vest on December 31, 2023 after three years (not prorated) of continued employment with ABC. ABC expects four employees to fulfill the vesting requirements, and no other restrictions apply.

3. If all five executives unexpectedly left the company on 1/1/23, what entry would ABC prepare that day/year?

4. If instead all five executives remain with the company through all of 2023, what entry or entries would ABC prepare in 2023?

Please explain how to solve for the numbers in 3 and 4 !! Thank you

Answer 1

Solution:

Question:3

Date	Account Titles and Explanation	Debit	Credit
1/1/2023	Paid-in -Capital-Restricted Stock [87000/3*2]	$            58,000
	Compensation Expense		$               58,000
	[To record reverse of compensation expense]

Notes:

1) As given in the question, if all 5 executives left the company then continued employment condition will not be satisfied and we have to reverse the compensation expense recorded till now i.e., is two years expense [$87000 / 3 years * 2 years]

Question:4

Date	Account Titles and Explanation	Debit	Credit
31/12/2023	Compensation Expense	$            29,000
	Paid-in -Capital-Restricted Stock [87000/3]		$               29,000
	[To record compensation expense]
31/12/2023	Cash	$            25,000
	Paid-in -Capital-Restricted Stock	$            87,000
	Common Stock [5000 * $5]		$               25,000
	Paid-in -Capital in excess of par-Common Stock		$               87,000
	[To record common stock issue]

Notes:

1) If 5 executive exercised the option, we have to do two thing in third year.

a) Record compensation expense for 3rd year.

b) Issue of common stock at $5 par of [5000 shares * $5] and remaining to paid in capital in excess of par.