(4) Performance-Based Share Option Compensation Plan

On January 1, 2016, Pierce Company establishes a performance-based share option plan for its 80 top executives. The terms of the plan are that each executive is granted a maximum of 200 options after completing a 3-year service period. The exact number of options granted, however, depends on the percentage increase in sales over the 3-year period. The terms are: (1) if sales increase between 0% and 3%, each executive is granted 90 options; (2) if sales increase between 4% and 6%, each executive is granted 140 options; and (3) if sales increase at least 7%, each executive is granted the maximum number of options. Each option entitles the executive to acquire one share of the companys $10 par common stock at a price of $45. The options expire at the end of 4 years.

On the grant date, Pierce uses an option pricing model to estimate that the fair value of each share option is $15.50. Pierces employee turnover rate is expected to be 16% over the service period. At the end of 2017, because of lower turnover, Pierce revises its estimated turnover rate to 14% for the service period. At the end of 2018, options vest for 68 executives. On February 3, 2019, 50 executives exercise their options when the market price of the companys common stock is $62 per share. During the remainder of the year, the market price declines so that at the end of 2019 the other 18 executives allow their options to expire.

Based on a projection of past trends, on the grant date Pierce estimates that its sales will increase about 5% by the end of 2018. This estimate appears accurate through 2017. However, in the last half of 2018, sales increase so much that at the end of 2018 Pierce determines that its total sales have increased by 7% over the 3-year service period. All inventory is shipped by Pierce to its customers under FOB destination terms.

Required:

1.	Prepare a schedule of Pierces compensation computations for its compensatory share option plan for 2016 through 2018.
2.	Prepare Pierces memorandum and journal entries for 2016 through 2019 in regard to this plan.
3.	Show how the account(s) related to the plan is (are) reported in the shareholders equity section of Pierces December 31, 2017, balance sheet.

CHART OF ACCOUNTS

Pierce Company

General Ledger

	ASSETS
111	Cash
121	Accounts Receivable
141	Inventory
152	Prepaid Insurance
181	Equipment
198	Accumulated Depreciation

	LIABILITIES
211	Accounts Payable
231	Salaries Payable
250	Unearned Revenue
261	Income Taxes Payable

	EQUITY
311	Common Stock
320	Additional Paid-in Capital on Common Stock
325	Paid-in Capital from Share Options
326	Additional Paid-in Capital from Expired Share Options
331	Retained Earnings

	REVENUE
411	Sales Revenue

	EXPENSES
500	Cost of Goods Sold
511	Insurance Expense
512	Utilities Expense
521	Salaries Expense
522	Compensation Expense
532	Bad Debt Expense
540	Interest Expense
541	Depreciation Expense
559	Miscellaneous Expenses
910	Income Tax Expense

Prepare Pierces memorandum entry and the journal entry on December 31, 2016 in regard to this plan. Additional Instructions

PAGE 1

GENERAL JOURNAL

	DATE	ACCOUNT TITLE	POST. REF.	DEBIT	CREDIT
1
2

Prepare Pierces memorandum entry and the journal entry on December 31, 2017 in regard to this plan. Additional Instructions

PAGE 1

GENERAL JOURNAL

	DATE	ACCOUNT TITLE	POST. REF.	DEBIT	CREDIT
1
2

Prepare Pierces memorandum entry and the journal entry on December 31, 2018 in regard to this plan. Additional Instructions

PAGE 1

GENERAL JOURNAL

	DATE	ACCOUNT TITLE	POST. REF.	DEBIT	CREDIT
1
2

Prepare Pierces memorandum entry and the journal entries on February 3, 2019 and December 31, 2019 in regard to this plan. Additional Instructions

PAGE 1

GENERAL JOURNAL

	DATE	ACCOUNT TITLE	POST. REF.	DEBIT	CREDIT
1
2
3
4
5
6

Show how the account(s) related to the plan is (are) reported in the shareholders equity section of Pierces December 31, 2017, balance sheet. Additional Instructions

PIERCE COMPANY

Partial Shareholders' Equity

December 31, 2017

1	Contributed Capital:
2

Prepare a schedule of Pierces compensation computations for its compensatory share option plan for 2016 through 2018.Additional Instructions

PIERCE COMPANY

Compensatory Share Option Computations

2016 through 2018

1		2016	2017	2018
2	Estimated (actual) total compensation cost
3	Fraction of service period expired	1/3	2/3	3/3
4	Estimated compensation expense to date
5	Previously recognized compensation expense
6	Current compensation expense