How do I figure out the journal entries?

EPS and Stock Based Compensation

Homework Problems

Problem 1

Pele, Inc. is a publicly traded corporation that has been successful in business for many years.In 2015, Pele decides to modernize its compensation system for management employees with a stock based compensation plan.The plan will consist of stock appreciation rights and stock options granted to employees.The amount of shares/options involved in the plan will be determined by the company performance in 2015 and will be granted at the end of 2015.Management employees will vest in the stock appreciation rights over 3 years and in the stock options over 5 years of continued service.

2015 Net Income is $52 million which means 200,000 SAR's are granted and 400,000 options are granted.Each SAR entitles the holder to the difference between the stock price on December 31 and $20 paid in cash on Feb 15, 2019 if they are still employed on December 31, 2018.Each stock option entitles the holder to purchase a share of stock at $20 (price of shares are $20 each on December 31, 2015) if they are still employed on December 31, 2020.The Black-Scholes pricing model determined that each option was worth $4 on December 31, 2015.

All SARs and options are granted to employees on December 31, 2015.

Required:

1.Give journal entries, if any, that are needed to record this compensation plan on December 31, 2015.

2.Give the journal entries for the plan on December 31, 2016 if the price of the stock is $23 assuming that all employees granted are still employed.

3.Give the journal entries for the plan on December 31, 2017 if the price of the stock is $26 but 20% of the SARs and options have been forfeited because employees left employment.

4.Give the journal entry on Feb 15, 2019 assuming there are no additional forfeitures since 2017 and the price of the shares is $25 which is also the price on December 31, 2018.

5.Give the journal entry on March 1, 2021 for the exercise of all outstanding stock options.There were no additional forfeitures beyond those in 2017.