Answer:
Beckford Company
a) A schedule of Compensation Expense for each year:
Stock-Appreciation Rights (SARs):
Date Due SARs Fair Value Compensation Annual %
of SARs Recognizable Expenses
December 31, 2011 150,000 $4 $600,000 $150,000 (25%)
December 31, 2012 150,000 $1 150,000 37,500 (25%)
December 31, 2013 150,000 $10 $1,500,000 375,000 (25%)
December 31, 2014 150,000 $9 $1,350,000 337,500 (25%)
Total SARs Compensation Expense for the 4 years = $900,000
b) Journal Entry at December 31, 2014 to record compensation expense:
Debit Compensation Expense (SARs) $337,500
Credit SARs Liability $337,500
To record the compensation expense for 2014.
c) Debit Compensation Expense (SARs) $900,000
Credit SARs Liability $900,000
To record the compensation expense for the four years.
Explanation:
a) Data and Calculations:
Stock-appreciation rights = 150,000
Period of exercise = 4 years
Portion exercisable each year = 37,500 (150,000/4)
Pre-established price of SARs = $10
Fair values of the SARs are:
December 31, 2011 = $4
December 31, 2012 = $1
December 31, 2013 = $10
December 31, 2014 = $9
b) Stock Appreciation Rights (SARs), like stock options, compensate Beckford employees during a predetermined period of four years with the difference between the stock's market price and a predetermined price of $10. Since the SARs are exercisable over four years, the compensation expense is based on the portion of the stock that is exercisable each year (which is 150,000 divided by 4). It differs from stock options because employees are entitled to a cash payment or stock issuance at the end of the period, whereas employees pay for stock options when they exercise them.
