Question

On January 1, 2017, Orr Co. established a share 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 ordinary shares and a pre established price of $16 on 300,000 SARs. The fair value of the SARs is estimate as follows: 12/31/17—$5; 12/31/18—$2; 12/31/19—$3; 12/31/20—$4. On December 31, 2019, 50,000 SARs are exercised, and the remaining SARs are exercised on December 31, 2020.

Instructions:

(a)        Prepare a schedule that shows the amount of compensation expense for each of the four years starting with 2017.

Schedule of Compensation Expense
300,000 SARs
Date	Fair Value	Cumulative Compensation Recognizable	Percentage Accrued	Compensation Accrued to Date	Expense
12/31/17	$5		25%
12/31/18	$2		50%
12/31/19	$3		75%
12/31/20	$4		100%

(b)       Prepare the journal entry at 12/31/19 to record compensation expense.

Liability Under Share Appreciation Plan
Compensation Expense

(c)        Prepare the journal entry at 12/31/20 to record the exercise of the remaining SARs.

Liability Under Share Appreciation Plan

Answer 1

1
Schedule of Compensation Expense
300,000 SARs
Date	Fair Value	Cumulative Compensation Recognizable	Percentage Accrued	Compensation Accrued to Date	Expense
12/31/2017	$5	1500000	25%	375000	375000
		(5*300000)		-75000
12/31/2018	$2	600000	50%	300000	-75000
		(2*300000)		375000
12/31/2019	$3	900000	75%	675000	375000
		(3*300000)		325000
12/31/2020	$4	1000000	100%	1000000	325000
		(4*250000)
b
Date	General Journal	Debit	Credit
12/31/2019	Liability under share application plan	75000
	Compensation expense		75000
C
12/31/2020	Liability under share application plan	1000000
	Cash		1000000