Question

Assume that Sarazan Company has a share-option plan for top management. Each share option represents the right to purchase a \(1 par value ordinary share in the future at a price equal to the fair value of the shares at the date of the grant. Sarazan has 5,000 share options outstanding, which were granted at the beginning of 2017. The following data relate to the option grant.

Exercise price for options \)40

Market price at grant date (January 1, 2017) \(40

Fair value of options at grant date (January 1, 2017) \)6

Service period 5 years

Instructions

(a) Prepare the journal entry(ies) for the first year of the share-option plan.

(b) Prepare the journal entry(ies) for the first year of the plan assuming that, rather than options, 700 shares of restricted shares were granted at the beginning of 2017.

(c) Now assume that the market price of Sarazan shares on the grant date was $45 per share. Repeat the requirements for (a) and (b).

(d) Sarazan would like to implement an employee share-purchase plan for rank-and-file employees, but it would like to avoid recording expense related to this plan. Explain how employee share-purchase plans are recorded?

Short answer

1. The journal entries are recorded in Step 1.
2. The journal entries are recorded in Step 2
3. The journal entries are recorded in Step 3.
4. Whether an employee has a qualified or a disqualified demeanour decides the amount of the pay that is on an employee's W-2.

Step-by-step solution

(a) The journal entry(ies) for the first year

Date	Account titles and Explanation	Debit	Credit
Jan. 1	No entry
Dec.31	Compensation expense [(5,000 x $6) / 5]	$ 6,000
	Share premium-share options		$ 6,000

(b) The journal entry(ies) for the first year of the plan assuming that rather than options, 700 shares of the restricted shares were granted at the beginning of 2017

(b)

Date	Account titles and Explanation	Debit	Credit
Jan. 1, 2017	Unearned compensation ($40 x 700)	$ 28,000
	Share capital-Ordinary ($1 x 700)		$ 700
	Share premium-ordinary		$ 27,300
Dec. 31, 2017	Compensation expense ($28,000 / 5)	$ 5,600
	Unearned compensation		$ 5,600

 Step 3: (c) The market price of the Sarazan shares on the grant date was $45 per share. The requirements for (a) and (b) are repeated

(c)

Date	Account titles and Explanation	Debit	Credit
(Part a)	No change for part a unless the fair value of the options change
(Part b)
Jan. 1, 2017	Unearned compensation ($45 x 700)	$ 31,500
	Share capital-Ordinary ($1 x 700)		$ 700
	Share premium-ordinary		$ 30,800
Dec. 31, 2017	Compensation expense ($31,500/5)	$ 6,300
	Unearned compensation		$ 6,300

(d) Employee share-purchase plans

At a point when the Employee Share-Purchase Plans (ESPP) shares are sold, the employer reports ESPP pay as wages in box 1 of the Form W-2. ESPPs have no portion for income taxes, and Social Securities and Medicare taxes don't have any significant bearing.