On January 1, 2013, Orr Co. established a stock appreciation rights plan for its
ID: 2498240 • Letter: O
Question
On January 1, 2013, Orr Co. established a stock appreciation rights plan for its executives. They could receive cash at any time during the next four years equal to the difference between the market price of the common stock and a preestablished price of $15on 350,000 SARs. The market price is as follows: 12/31/13-$20; 12/31/14-$16; 12/31/15-$18; 12/31/16-$19. On December 31, 2015, 65,000 SARs are exercised, and the remaining SARs are exercised on December 31, 2016. Prepare the journal entry at 12/31/14 to record compensation expense. Prepare the journal entry at 12/31/16 to record the exercise of the remaining SARs
Schedule of Schedule
Date
Market Price
Set Price
Value of SARs
Percent Accrued
Accrued to Date
Expense
12/31/13
12/31/14
12/31/15
12/31/16
Prepare the journal entry at 12/31/14 to record compensation expense
Date
Account Title & Explanation
Debit
Credit
12/31/2014
Prepare the journal entry at 12/31/16 to record the exercise of the remaining SARs.
Date
Account Title & Explanation
Debit
Credit
12/31/2016
Date
Market Price
Set Price
Value of SARs
Percent Accrued
Accrued to Date
Expense
12/31/13
12/31/14
12/31/15
12/31/16
Explanation / Answer
31-Dec-2014
Compensation expense account debit 350,000
To liability, SAR Plan 350,000
(To record compensation as a result of change in stock value)
Analysis of compensation expense
Market price $16
Price at grant date $15
Increase in value $1
Number of SAR’s 350,000
Total increase in SAR’s value 350,000
Compensation expense 350,000
Journal entry at 12/31/16 to record the exercise of the remaining SARs
31-Dec-2016
Compensation expense account debit 1,400,000
To liability, SAR Plan 1,400,000
(To record compensation as a result of change in stock value)
Analysis of compensation expense
Market price $19
Price at grant date $15
Increase in value $4
Number of SAR’s 350,000
Total increase in SAR’s value 1,400,000
Compensation expense 1,400,000
When SAR are exercised on 12/31/16
Liability, SAR Plan 1,400,000
To cash 1,400,000
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