Question

E16-30 (L06) (Stock-Appreciation Rights) Capulet Company establishes a stock-appreciation rights program that entitles its new president Ben Davis to receive cash for the difference between the market price of the stock and a pre-established price of \(30 (also market price) on December 31, 2013, on 30,000 SARs. The date of grant is December 31, 2013, and the required employment (service) period is 4 years. President Davis exercises all of the SARs in 2019. The fair value of the SARs is estimated to be \)6 per SAR on December 31, 2014; \(9 on December 31, 2015; \)15 on December 31, 2016; \(6 on December 31, 2017; and \)18 on December 31, 2018.

Instructions

(a) Prepare a 5-year (2014–2018) schedule of compensation expense pertaining to the 30,000 SARs granted president Davis.

(b) Prepare the journal entry for compensation expense in 2014, 2017, and 2018 relative to the 30,000 SARs.

Short answer

The compensation expense for the year 2018 is $360,000.

Step-by-step solution

Schedule of compensation expense

Date	Fair Value	Cumulative compensation recognizable	Percentage Accrued	Compensation accrued to date	Expense 2014	Expense 2015	Expense 2016	Expense 2017	Expense 2018
December 31, 2014	$6	$180,000	25%	$45,000	$45,000
				$90,000
December 31, 2015	$9	$270,000	50%	$135,000		$90,000
				$202,500
December 31, 2016	$15	$450,000	75%	$337,500			$202,500
				$157,500
December 31, 2017	$6	$180,000	100%	$180,000				($157,500)
				$360,000
December 31, 2018	$18	$540,000	-	$540,000					$360,000

Journal entries for compensation expense

Date	Particulars	Debit	Credit
2014	Compensation Expense	$45,000
	Liability Under Stock Appreciation Plan		$45,000
	(Being entry for the compensation expense)
2017	Liability Under Stock Appreciation Plan	$157,500
	Compensation Expense		$157,500
	(Being entry for the compensation expense)
2018	Compensation Expense	$360,000
	Liability Under Stock Appreciation Plan		$360,000
	(Being entry for the compensation expense)