Stock Awards

Question 1

Types of questions:

Answer 1

• Terminology
• Amount of Compensation Expense
• Amount of Deferred Compensation
• Impact on financial statements

Question 2

What is a stock award?

Answer 2

The stock is restricted until the award vests

Known as a RSU (restricted stock unit)- Very similar to stock awards, they are not issued until they vest

Question 3

How do you calculate compensation expense at grant date?

Answer 3

Total compensation expense= fair value of the stock at grant date over the service period

Question 4

Example: ON 1/1/X5 1,000 shares of restricted $2 par common stock were granted to managers when the market price of the stock was $18.

The service period to vesting is 3 years

What is compensation expense?

Answer 4

Compensation expense= (1,000 X 18)= $18,000
Vesting period: 3 years
Per Year: $18,000/3 years

Question 5

What is the journal entry for compensation expense AND when the awards are vested?

Answer 5

ALL THREE YEARS:
Compensation Expense $6000
APIC- Restricted Stock ($6,000)

VESTED:
DR: APIC- Restricted Stock $18,000
CR: Common Stock $2,000
CR: APIC- Common Stock $16,000

Question 6

How do you treat forfeitures?

Answer 6

If the award does not vest, the expense is reversed.

Reversal is appropriate because the firm did not give anything to the manager.

Prior year statements are not adjusted.

Question 7

Example with forfeiture: Assume 200 of the 1,000 shares were forfeited in 20X6. Annual compensation expense is $6,000 or $6/share per year (1,000 shares).

What is the journal entry to adjust compensation expense?

Answer 7

DR: APIC- Restricted Stock $1200
CR: Compensation Expense ($1200)

DR: Compensation Expense 4,800
CR: APIC- Restricted Stock ($4,800)