8-43 Module 8 1 Equity Recognition and Owner Financing LO3 P8-53. Identifying an

Question

8-43 Module 8 1 Equity Recognition and Owner Financing LO3 P8-53. Identifying and Analyzing Financial Statement Effects of Stock-Based Compensation The stockholders' equity of Fowler Company at December 31,2016, follows 7% Preferred stock, $100 par value, 20,000 shares authorized; Common stock, $15 par value, 300,000 shares authorized; Paid-in capital in excess of par value-preferred stock. $ 400,000 . . . 450,000 36,000 360,000 325,000 The following transactions, among others, occurred during the following year Employees exercised 12,000 stock options that were granted in 2012 and had a three-year vesting period. These options had an estimated fair value of S2 at the grant date, and an exercise price of $16. There were no other vested or unvested options after this exercise. Awarded 1,000 shares of stock to a new executives, when the stock price was $36 · Sold 10,000 shares to employees under the company-wide stock purchase plan. Under the plan, employees purchased the shares at a 10% discount when the stock price was $33 per share Granted 40,000 new stock options, with a strike price of $34 and an estimated fair value of $6. The options vest over three years Required Prepare the December 31, 2017, statement of stockholders' equity assuming that the company reports 2017 pretax income of $483,000 before the effects of stock-based compensation. Assume the company has a 35% tax rate

Explanation / Answer

1. Total Employees compensation expense is (12000 shares * fair value of options)

=. 12000* $2. =. $ 24000. These expenses will be amortised over 3 years vesting period . So at the end of 2014-2015 the expense had been recorded and amortised through profit and loss statement. And The Employees Stock option outstanding account has balance of 12000 shares multiplied by fair value ie $2 = $ 24000.

So in the year of 2016 the entry for issuing these shares will be

Cash account debit. $ 192000 (12000*$16)

Employees options outstanding. Debit $ 24000 (12000*$2)

To Common stock. Credit. $180000 (12000* $ 15)

To additional paid in capital credit. $ 36000 (balancing figure)

2. Awarded shares

Award Expense Debit. $36000(1000*36)

To common stock. Credit. $. 15000. (1000* 15)

To additional paid in capital. $ 21000

3. Employees stock purchase plan : where no vesting conditions were there. Share price is $ 33 - $3.3(33*10%) =29.7

Cash. Debit. $ 297000

Employees compensation expense. Debit. $. 33000.

To common stock credit. $ 150000 (10000*15)

To additional paid in capital. Credit. $ 180000

4. The employees compensation expense ie 40000 shares * $ 6 (fair value) = $240000 will be amortised over 3 year of vesting period equally.This year ‘s expenses are $240000/3years = $ 80000

Employees compensation expense Debit. $80000

To employees stock options outstanding credit. $ 80000

• Entry for transferring the expense to PL

Profit and Loss.or Retained earnings Debit $149000

To. Employees compensation expense credit. $ 113000 ($80000+$33000)

To Award expenses. Credit. $36000

Statement of stock holders equity

7% preferred stock, $ 100 par value, 20000 shares authorised ;

4000 shares issued and outstanding.................. $400000

Common stock $ 15 par value, 300000 shares authorised;

53000 Shares issued and outstanding................. $ 795000

Paid in capital in excess of par value...Preferred stock .....$ 36000

Paid in capital in excess of par value....Common stock ..... $ 597000

Employees stock options outstanding...............................$ 80000

Retained earnings .[(483000-149000) less 35% tax]...... $ 217100

Total stock holders equity $. 2125100

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