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Chapter 16: Q14E (page 876)

(Accounting for Restricted Stock) Tweedie Company issues 10,000 shares of restricted stock to its CFO, Mary Tokar, on January 1, 2017. The stock has a fair value of \(500,000 on this date. The service period related to this restricted stock is 5 years. Vesting occurs if Tokar stays with the company until December 31, 2021. The par value of the stock is \)10. At December31, 2017, the fair value of the stock is $450,000.

Instructions

(a) Prepare the journal entries to record the restricted stock on January 1, 2017 (the date of grant), and December 31, 2018.

(b) On July 25, 2021, Tokar leaves the company. Prepare the journal entry (if any) to account for this forfeiture

Short Answer

Expert verified

(a) Unearned compensation will be debited by $500,000, and common stock and paid in capital in excess of par- common stock will be credited by $100,000 and $400,000, respectively. Compensation expense will be debited, and unearned compensation will be credited by $100,000, respectively.

(b) Common stock and paid In capital in excess of par- common stock will be debited by $100,000 and $400,000, respectively, and compensation expense and unearned compensation will be credited $400,000 and $100,000, respectively.

Step by step solution

01

(a) Journal Entry

Date

Accounts and Explanation

Debit

Credit

January 1, 2017

Unearned Compensation

$500,000

Common Stock ($10 X 10,000)

$100,000

Paid-in Capital in Excess of Par— Common Stock (Bal. fig.)

$400,000

December 31, 2018

Compensation Expense ($500,000 / 5)

$100,000

Unearned Compensation

$100,000

02

(b) Journal Entry

Date

Accounts and Explanation

Debit

Credit

July 25, 2021

Common Stock

$100,000

Paid-in Capital in Excess of Par—Common Stock

$400,000

Compensation Expense

$400,000

Unearned Compensation

$100,000

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Most popular questions from this chapter

Financial Statement Analysis Case

Ragatz, Inc.

Ragatz, Inc., a drug company, reported the following information. The company prepares its financial statements in accordance with GAAP.

2017 (000)

Current liabilities

\(554,114

Convertible subordinated debts

648,020

Total liabilities

1,228,313

Stockholder’s equity

176,413

Net income

58,333

Analysts attempting to compare Ragatz to drug companies that issue debt with detachable warrants may face a challenge due to differences in accounting for convertible debt.

Instructions

(a) Compute the following ratios for Ragatz, Inc. (Assume that year-end balances approximate annual averages.)

(1) Return on assets.

(2) Return on common stock equity.

(3) Debt to assets ratio.

(b) Briefly discuss the operating performance and financial position of Ragatz. Industry averages for these ratios in 2017 were ROA 3.5%; return on equity 16%; and debt to assets 75%. Based on this analysis, would you make an investment in the company’s 5% convertible bonds? Explain.

(c) Assume you want to compare Ragatz to an IFRS company like Merck (which issues nonconvertible debt with detachable warrants). Assuming that the fair value of the equity component of Ragatz’s convertible bonds is \)150,000, how would you adjust the analysis above to make valid comparisons between Ragatz and Merck?

(Issuance, Exercise, and Termination of Stock Options) On January 1, 2018, Titania Inc. granted stock options to officers and key employees for the purchase of 20,000 shares of the company’s \(10 par common stock at \)25 per share. The options were exercisable within a 5-year period beginning January 1, 2020, by grantees still in the employ of the company, and expiring December 31, 2024. The service period for this award is 2 years. Assume that the fair value option-pricing model determines total compensation expense to be \(350,000.On April 1, 2019, 2,000 options were terminated when the employees resigned from the company. The market price of the common stock was \)35 per share on this date.On March 31, 2020, 12,000 options were exercised when the market price of the common stock was $40 per share.

Instructions

Prepare journal entries to record issuance of the stock options, termination of the stock options, exercise of the stock options, and charges to compensation expense, for the years ended December 31, 2018, 2019, and 2020.

Kalin Corporation had 2017 net income of \(1,000,000. During 2017, Kalin paid a dividend of \)2 per share on 100,000 shares of preferred stock. During 2017, Kalin had outstanding 250,000 shares of common stock.Compute Kalin’s 2017 earnings per share.

Ferraro, Inc. established a stock-appreciation rights (SARs) program on January 1, 2017, which entitles executives to receive cash at the date of exercise for the difference between the market price of the stock and the pre-established price of \(20 on 5,000 SARs. The required service period is 2 years. The fair value of the SARs are determined to be \)4 on December 31,2017, and $9 on December 31, 2018. Compute Ferraro’s compensation expense for 2017 and 2018.

(EPS with Convertible Bonds and Preferred Stock) The Simon Corporation issued 10-year, \(5,000,000 par, 7% callable convertible subordinated debentures on January 2, 2017. The bonds have a par value of \)1,000, with interest payable annually. The current conversion ratio is 14:1, and in 2 years it will increase to 18:1. At the date of issue, the bonds were sold at 98. Bond discount is amortized on a straight-line basis. Simon’s effective tax was 35%. Net income in 2017 was $9,500,000, and the company had 2,000,000 shares outstanding during the entire year.

Instructions

(a) Prepare a schedule to compute both basic and diluted earnings per share.

(b) Discuss how the schedule would differ if the security was convertible preferred stock
See all solutions

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