Question 1 section 3

3. What is the effect of the forfeiture of the stock options on Ensors financial statements for 2012 and 2013?

How did they get 90% in the calculations?

Score: 40 1. out of 40 points (100%) award: 10 out of 10.00 points On October 15, 2012, the board of directors of Ensor Materials Corporation approved a stock option plan for key executives. On January 1, 2013, 20 million stock options were granted, exercisable for 20 million shares of Ensor's $1 par common stock. The options are exercisable between January 1, 2016, and December 31, 2018, at 80% of the quoted market price on January 1, 2013, which was $15. The fair value of the 20 million options, estimated by an appropriate option pricing model, is $6 per option. Two million options were forfeited when an executive resigned in 2014. All other options were exercised on July 12, 2017, when the stock's price jumped unexpectedly to $19 per share. Required: 1. When is Ensor's stock option measurement date? January 1, 2013 2. Determine the compensation expense for the stock option plan in 2013. (Ignore taxes.) (Enter your answer in millions.) Compensation expense $ 40 million 3. What is the effect of forfeiture of the stock options on Ensor's financial statements for 2014 and 2015? (If no entry is required for a particular transaction, select "No journal entry required" in the first account field. Enter your answers in millions (i.e., 10,000,000 should be entered as 10).) Date 2014 General Journal Compensation expense Debit Credit 32 Paid-in capitalStock options 2015 Compensation expense Paid-in capitalStock options 32 36 36 5. How should Ensor account for the exercise of the options in 2017? (If no entry is required for a particular transaction, select "No journal entry required" in the first account field. Enter your answers in millions (i.e., 10,000,000 should be entered as 10).) Date 2017 General Journal Debit Cash 216 Paid-in capitalStock options 108 Credit Common stock 18 Paid-in capitalExcess of par 306 Learning Objective: 19-02 Explain and implement the accounting for stock options. Problem On October 15, 2012, the board of directors of Ensor Materials Corporation approved a stock option plan for key executives. On January 1, 2013, 20 million stock options were granted, exercisable for 20 million shares of Ensor's $1 par common stock. The options are exercisable between January 1, 2016, and December 31, 2018, at 80% of the quoted market price on January 1, 2013, which was $15. The fair value of the 20 million options, estimated by an appropriate option pricing model, is $6 per option. Two million options were forfeited when an executive resigned in 2014. All other options were exercised on July 12, 2017, when the stock's price jumped unexpectedly to $19 per share. Required: 1. When is Ensor's stock option measurement date? January 1, 2013 2. Determine the compensation expense for the stock option plan in 2013. (Ignore taxes.) (Enter your answer in millions.) Compensation expense $ 40 million 3. What is the effect of forfeiture of the stock options on Ensor's financial statements for 2014 and 2015? (If no entry is required for a particular transaction, select "No journal entry required" in the first account field. Enter your answers in millions (i.e., 10,000,000 should be entered as 10).) Date 2014 General Journal Compensation expense Debit Credit 32 Paid-in capitalStock options 2015 Compensation expense Paid-in capitalStock options 32 36 36 5. How should Ensor account for the exercise of the options in 2017? (If no entry is required for a particular transaction, select "No journal entry required" in the first account field. Enter your answers in millions (i.e., 10,000,000 should be entered as 10).) Date 2017 General Journal Debit Credit Cash 216 Paid-in capitalStock options 108 Common stock Paid-in capitalExcess of par 18 306 Explanation: 1. The measurement date is always is the date of grant, January 1, 2013. 2. $ 6 estimated fair value per option 20 million options granted = $120 million fair value of award The total compensation is to be allocated to expense over the 3-year service (vesting) period: 2013 - 2015 $120 million 3 years = $40 million per year 3. Ensor should adjust the cumulative amount of compensation expense recorded to date in the year the estimate changes. 2014 Compensation expense ([$120 90% 2/3] - $40) = $32 million 2015 Compensation expense ([$120 90% 3/3] - $40 - $32) = $36 million 5. Cash ($15 80% = $12 exercise price 18 million shares) = $216 million Common stock (18 million shares at $1 par per share) = $18 million Note: The market price at exercise is irrelevant. Score: 40 2. out of 40 points (100%) award: 10 out of 10.00 points Pastner Brands is a calendar-year firm with operations in several countries. As part of its executive compensation plan, at January 1, 2013, the company issued 400,000 executive stock options permitting executives to buy 400,000 shares of Pastner stock for $34 per share. One-fourth of the options vest in each of the next four years beginning at December 31, 2013 (graded vesting). Pastner elects to separate the total award into four groups (or tranches) according to the year in which they vest and measures the compensation cost for each vesting date as a separate award. The fair value of each tranche is estimated at January 1, 2013, as follows: Vesting Date Dec. 31, 2013 Dec. 31, 2014 Dec. 31, 2015 Dec. 31, 2016 Amount Vesting 25% 25% 25% 25% Fair Value per Option $3.50 $4.00 $4.50 $5.00 Required: 1. Determine the compensation expense related to the options to be recorded each year 2013-2016, assuming Pastner allocates the compensation cost for each of the four groups (tranches) separately. Shares Compensation Expense Recorded in: Vesting at: Dec. 31, 2013 2013 $ 2014 2015 2016 350,000 Dec. 31, 2014 200,000 Dec. 31, 2015 150,000 $ 200,000 150,000 125,000 Dec. 31, 2016 $ 825,000 $ 150,000 125,000 $ 475,000 125,000 $ 275,000 Total $ 125,000 $ 125,000 $ 1,700,000 2. Determine the compensation expense related to the options to be recorded each year 2013-2016, assuming Pastner uses the straight-line method to allocate the total compensation cost. 2013 Compensation expense $ 2014 425,000 $ 425,000 2015 $ 425,000 2016 $ 425,000 Learning Objective: 19-02 Explain and implement the accounting for stock options. Problem Pastner Brands is a calendar-year firm with operations in several countries. As part of its executive compensation plan, at January 1, 2013, the company issued 400,000 executive stock options permitting executives to buy 400,000 shares of Pastner stock for $34 per share. One-fourth of the options vest in each of the next four years beginning at December 31, 2013 (graded vesting). Pastner elects to separate the total award into four groups (or tranches) according to the year in which they vest and measures the compensation cost for each vesting date as a separate award. The fair value of each tranche is estimated at January 1, 2013, as follows: Vesting Date Dec. 31, 2013 Dec. 31, 2014 Dec. 31, 2015 Dec. 31, 2016 Amount Vesting 25% 25% 25% 25% Fair Value per Option $3.50 $4.00 $4.50 $5.00 Required: 1. Determine the compensation expense related to the options to be recorded each year 2013-2016, assuming Pastner allocates the compensation cost for each of the four groups (tranches) separately. Total $ 1,700,000 Shares Compensation Expense Recorded in: Vesting at: Dec. 31, 2013 2013 $ 2014 2015 2016 350,000 Dec. 31, 2014 200,000 Dec. 31, 2015 150,000 150,000 Dec. 31, 2016 125,000 125,000 $ 825,000 $ 200,000 $ 475,000 $ 150,000 125,000 $ 275,000 Total $ 125,000 $ 125,000 $ 1,700,000 2. Determine the compensation expense related to the options to be recorded each year 2013-2016, assuming Pastner uses the straight-line method to allocate the total compensation cost. 2013 Compensation expense $ 2014 425,000 $ 425,000 2015 $ 425,000 2016 $ 425,000 Explanation: 1. We treat each individual vesting date as a separate award: Vesting Date Dec. 31, 2013 Dec. 31, 2014 Dec. 31, 2015 Dec. 31, 2016 Number Vesting 100,000 100,000 100,000 100,000 Fair Value per Option $ 3.50 $ 4.00 $ 4.50 $ 5.00 Compensation Cost $ 350,000 400,000 450,000 500,000 $1,700,000 Also, a company must have recognized at least the amount vested by that date. The allocation here meets that constraint: The $825,000 recognized in 2013 exceeds the $350,000 vested. The $1,300,000 ($825,000 + $475,000) recognized by 2014 exceeds the $750,000 ($350,000 + $400,000) vested by the same time. The $1,575,000 ($825,000 + $475,000 + $275,000) recognized by 2015 exceeds the $1,200,000 ($350,000 + $400,000 + $450,000) vested by the same time. 2. Companies are allowed to use the straight-line method. The $1,700,000 total compensation cost is allocated equally to 2013, 2014, 2015, and 2016 at $425,000 per year. Also, a company must have recognized at least the amount vested by that date. The straight-line allocation meets that constraint: The $425,000 recognized in 2013 exceeds the $350,000 vested. The $850,000 ($425,000 + $425,000) recognized by 2014 exceeds the $750,000 ($350,000 + $400,000) vested by the same time. The $1,275,000 ($425,000 + $425,000 + $425,000) recognized by 2015 exceeds the $1,200,000 ($350,000 + $400,000 + $450,000) vested by the same time. Total $ 1,700,000 Score: 40 3. out of 40 points (100%) award: 10 out of 10.00 points JBL Aircraft manufactures and distributes aircraft parts and supplies. Employees are offered a variety of share-based compensation plans. Under its nonqualified stock option plan, JBL granted options to key officers on January 1, 2013. The options permit holders to acquire six million of the company's $1 par common shares for $22 within the next six years, but not before January 1, 2016 (the vesting date). The market price of the shares on the date of grant is $26 per share. The fair value of the 6 million options, estimated by an appropriate option pricing model, is $6 per option. Because the plan does not qualify as an incentive plan, JBL will receive a tax deduction upon exercise of the options equal to the excess of the market price at exercise over the exercise price. The tax rate is 40%. Required: 1. Determine the total compensation cost pertaining to the incentive stock option plan. (Enter your answer in millions.) The total compensation cost $ 36 million 2. Prepare the appropriate journal entries to record compensation expense and its tax effect on December 31, 2013, 2014, and 2015. (If no entry is required for a particular transaction, select "No journal entry required" in the first account field. Enter your answers in millions rounded to 1 decimal place (i.e., 5,500,000 should be entered as 5.5).) Date December 31, 2013 General Journal Compensation expense Debit Credit 12.0 Paid-in capitalStock options December 31, 2013 Deferred tax asset 12.0 4.8 Income tax expense 4.8 3. Record the exercise of the options and their tax effect if all of the options are exercised on August 21, 2017, when the market price is $27 per share. (If no entry is required for a particular transaction, select "No journal entry required" in the first account field. Enter your answers in millions rounded to 1 decimal place (i.e., 5,500,000 should be entered as 5.5).) Date August 21, 2017 General Journal Cash Paid-in capitalStock options Debit 132.0 36.0 Common stock 6.0 Paid-in capitalExcess of par August 21, 2017 Paid-in capitalTax effect of stock options Income tax and employment tax payable Deferred tax asset Credit 162.0 2.4 12.0 14.4 Learning Objective: 19-02 Explain and implement the accounting for stock options. Problem JBL Aircraft manufactures and distributes aircraft parts and supplies. Employees are offered a variety of share-based compensation plans. Under its nonqualified stock option plan, JBL granted options to key officers on January 1, 2013. The options permit holders to acquire six million of the company's $1 par common shares for $22 within the next six years, but not before January 1, 2016 (the vesting date). The market price of the shares on the date of grant is $26 per share. The fair value of the 6 million options, estimated by an appropriate option pricing model, is $6 per option. Because the plan does not qualify as an incentive plan, JBL will receive a tax deduction upon exercise of the options equal to the excess of the market price at exercise over the exercise price. The tax rate is 40%. Required: 1. Determine the total compensation cost pertaining to the incentive stock option plan. (Enter your answer in millions.) The total compensation cost $ 36 million 2. Prepare the appropriate journal entries to record compensation expense and its tax effect on December 31, 2013, 2014, and 2015. (If no entry is required for a particular transaction, select "No journal entry required" in the first account field. Enter your answers in millions rounded to 1 decimal place (i.e., 5,500,000 should be entered as 5.5).) Date December 31, 2013 General Journal Debit Compensation expense Credit 12.0 Paid-in capitalStock options December 31, 2013 12.0 Deferred tax asset 4.8 Income tax expense 4.8 3. Record the exercise of the options and their tax effect if all of the options are exercised on August 21, 2017, when the market price is $27 per share. (If no entry is required for a particular transaction, select "No journal entry required" in the first account field. Enter your answers in millions rounded to 1 decimal place (i.e., 5,500,000 should be entered as 5.5).) Date August 21, 2017 General Journal Cash Paid-in capitalStock options Debit Credit 132.0 36.0 Common stock 6.0 Paid-in capitalExcess of par August 21, 2017 Income tax and employment tax payable Paid-in capitalTax effect of stock options Deferred tax asset Explanation: 1. At January 1, 2013, the total compensation is measured as: 162.0 12.0 2.4 14.4 $ 6 fair value per option 6 million options granted = $36 million fair value of award 2. Dec. 31, 2013, 2014, 2015 Compensation expense ($36 million 3 years) = $12.0 million Deferred tax asset ($12 million 40%) = $4.8 million Since the plan does not qualify as an incentive plan, JBL will deduct the difference between the exercise price and the market price at the exercise date. Under GAAP, we assume the temporary difference is the cumulative amount expensed for the options, $12 million, $24 million, and $36 million at Dec. 31, 2013, 2014, and 2015, respectively. So, the deferred tax benefit is 40% of that amount each year. 3. August 21, 2017 Cash ($22 exercise price 6 million shares) = $132.0 million Common stock (6 million shares at $1 par per share) = $6.0 million Income taxes payable ([$27 - 22] 6 million shares 40%) = $12.0 million Deferred tax asset (3 years $4.8 million) = $14.4 million Score: 40 4. out of 40 points (100%) award: 10 out of 10.00 points LCI Cable Company grants 1 million performance stock options to key executives at January 1, 2013. The options entitle executives to receive 1 million of LCI $1 par common shares, subject to the achievement of specific financial goals over the next four years. Attainment of these goals is considered probable initially and throughout the service period. The options have a current fair value of $12 per option. Required: 1. Prepare the appropriate entry when the options are awarded on January 1, 2013. (If no entry is required for a particular transaction, select "No journal entry required" in the first account field. Enter your answers in millions (i.e., 10,000,000 should be entered as 10).) Date January 01, 2013 General Journal Debit Credit No journal entry required 2. Prepare the appropriate entries on December 31 of each year 20132016. (If no entry is required for a particular transaction, select "No journal entry required" in the first account field. Enter your answers in millions (i.e., 10,000,000 should be entered as 10).) Date December 31, 2013 General Journal Compensation expense Debit Credit 3 Paid-in capitalStock options December 31, 2014 Compensation expense 3 3 Paid-in capitalStock options December 31, 2015 Compensation expense 3 3 Paid-in capitalStock options December 31, 2016 Compensation expense Paid-in capitalStock options 3 3 3 3. Suppose at the beginning of 2015, LCI decided it is not probable that the performance objectives will be met. Prepare the appropriate entries on December 31 of 2015 and 2016.(If no entry is required for a particular transaction, select "No journal entry required" in the first account field. Enter your answers in millions (i.e., 10,000,000 should be entered as 10).) Date Dec. 31, 2015 General Journal Debit Paid-in capitalStock options Credit 6 Compensation expense Dec. 31, 2016 6 No journal entry required Learning Objective: 19-02 Explain and implement the accounting for stock options. Problem LCI Cable Company grants 1 million performance stock options to key executives at January 1, 2013. The options entitle executives to receive 1 million of LCI $1 par common shares, subject to the achievement of specific financial goals over the next four years. Attainment of these goals is considered probable initially and throughout the service period. The options have a current fair value of $12 per option. Required: 1. Prepare the appropriate entry when the options are awarded on January 1, 2013. (If no entry is required for a particular transaction, select "No journal entry required" in the first account field. Enter your answers in millions (i.e., 10,000,000 should be entered as 10).) Date January 01, 2013 General Journal Debit Credit No journal entry required 2. Prepare the appropriate entries on December 31 of each year 20132016. (If no entry is required for a particular transaction, select "No journal entry required" in the first account field. Enter your answers in millions (i.e., 10,000,000 should be entered as 10).) Date December 31, 2013 General Journal Compensation expense Debit Credit 3 Paid-in capitalStock options December 31, 2014 Compensation expense 3 3 Paid-in capitalStock options December 31, 2015 Compensation expense 3 3 Paid-in capitalStock options December 31, 2016 Compensation expense Paid-in capitalStock options 3 3 3 3. Suppose at the beginning of 2015, LCI decided it is not probable that the performance objectives will be met. Prepare the appropriate entries on December 31 of 2015 and 2016.(If no entry is required for a particular transaction, select "No journal entry required" in the first account field. Enter your answers in millions (i.e., 10,000,000 should be entered as 10).) Date Dec. 31, 2015 General Journal Paid-in capitalStock options Debit Credit 6 Compensation expense Dec. 31, 2016 No journal entry required Explanation: 1. No entry until the end of the reporting period, but compensation must be estimated at the grant date: 1 million $12 = $12 million options estimated fair expected total value to vest compensation 2. Compensation expense ($12 million ) = $3 million 3. If, after two years, LCI estimates that it is not probable that the performance goals will be met, then the new estimate of the total compensation would change to: 0 $12 = $0 options estimated fair expected total value to vest compensation In that case, LCI would reverse the $6 million expensed in 2013-2014 because no compensation can be recognized for options that don't vest due to performance targets not being met, and that's the new expectation. 6