The contents of this chapter include all of the following: This chapter describe what an equity investment is and the criteria used to determine whether investments in securities should be classified as current or noncurrent on the balance sheet. | Investments PART II: Corporate Accounting Concepts and Issues Lecture 18 Review: Accounting for Stock Compensation Illustration: On November 1, 2011, the shareholders of Chen Company approve a plan that grants the company’s five executives options to purchase 2,000 shares each of the company’s $1 par value common stock. The company grants the options on January 1, 2012. The executives may exercise the options at any time within the next 10 years. The option price per share is $60, and the market price of the shares at the date of grant is $70 per share. Under the fair value method, the company computes total compensation expense by applying an acceptable fair value option-pricing model. The fair value option-pricing model determines Chen’s total compensation expense to be $220,000. Accounting for Stock Compensation Illustration: Assume that the expected period of benefit is two years, starting with the grant date. Chen would record the transactions related to this option contract as . | Investments PART II: Corporate Accounting Concepts and Issues Lecture 18 Review: Accounting for Stock Compensation Illustration: On November 1, 2011, the shareholders of Chen Company approve a plan that grants the company’s five executives options to purchase 2,000 shares each of the company’s $1 par value common stock. The company grants the options on January 1, 2012. The executives may exercise the options at any time within the next 10 years. The option price per share is $60, and the market price of the shares at the date of grant is $70 per share. Under the fair value method, the company computes total compensation expense by applying an acceptable fair value option-pricing model. The fair value option-pricing model determines Chen’s total compensation expense to be $220,000. Accounting for Stock Compensation Illustration: Assume that the expected period of benefit is two years, starting with the grant date. Chen would record the transactions related to this option contract as follows. Compensation Expense 110,000 Paid-in capital – Stock Options 110,000 Dec. 31, 2012 ($220,000 ÷ 2) * * Compensation Expense 110,000 Paid-in capital - Stock Options 110,000 Dec. 31, 2013 Accounting for Stock Compensation Exercise. If Chen’s executives exercise 2,000 of the 10,000 options (20 percent of the options) on June 1, 2015 (three years and five months after date of grant), the company records the following journal entry. Cash (2,000 x $60) 120,000 Paid-in Capital - Stock Options 44,000 Common Stock (2,000 x $1) 2,000 Paid-in Capital in Excess of Par 162,000 June 1, 2015 Accounting for Stock Compensation Expiration. If Chen’s executives fail to exercise the remaining stock options before their expiration date, the company records the following at the date of expiration. Paid-in Capital - Stock Options 176,000 Paid-in Capital – Expired Stock Options 176,000 Jan. 1, 2022 ($220,000 x 80%) * * Accounting for Stock Compensation Investments PART II: Corporate Accounting Concepts
