E16-29 (L06) (Stock-Appreciation Rights) On December 31, 2013, Beckford Company issues 150,000 stock-appreciation rights to its officers entitling them to receive cash for the difference between the market price of its stock and a pre-established price of \(10. The fair value of the SARs is estimated to be \)4 per SAR on December 31, 2014; \(1 on December 31, 2015; \)10 on December 31, 2016; and $9 on December 31, 2017. The service period is 4 years, and the exercise period is 7 years.

Instructions

(a) Prepare a schedule that shows the amount of compensation expense allocable to each year affected by the stockappreciation rights plan.

(b) Prepare the entry at December 31, 2017, to record compensation expense, if any, in 2017.

(c) Prepare the entry on December 31, 2017, assuming that all 150,000 SARs are exercised.

Short Answer

Expert verified

a. Compensation Expenses are $150,000, $75000, $1,125,000 and $1,350,000 for the year ended 2014, 2015, 2016 and 2017 respectively.

b. Liability under the stock appreciation plan is recorded at$225,000on December 31, 2017

c.The executives receives$1,35,000

Step by step solution

01

Meaning of Stock Appreciation Rights

Stock appreciation rights refer to the rights in which the executives have the right to receive compensation equal to the amount of stock appreciation.

02

Schedule showing the compensation expenses

Date

Fair Value

Cumulative compensation

% Accrued

Total

Balance

Year Expense

31.12.2014

$4

$600,000

25%

$150,000

-

2014

31.12.2015

$1

$150,000

50%

$75,000

($75,000)

2015

31.12.2016

$10

$1,500,000

75%

$1,125,000

$1,050,000

2016

31.12.2017

$9

$1,350,000

100%

$1,350,000

$225,000

2017

03

Step 3:Journal entry on December 31, 2014

Date

Accounts and Explanation

Debit ($)

Credit ($)

Dec 31, 2017

Liability under stock Appreciation Plan

1,350,000

Cash

1,350,000

(To record the realization of cash exercised)

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Show supporting computations in good form.

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