Copy of Chap019solutions2011

Copy of Chap019solutions2011 - Chapter 19 - Share-Based...

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Unformatted text preview: Chapter 19 - Share-Based Compensation and Earnings Per Share BRIEF EXERCISES $6 fair value per share x 8 million shares granted = $48 million fair value of award The $48 million total compensation is expensed equally over the three-year vesting period, reducing earnings by $16 million each year. $5 fair value per option x 12 million options granted = $60 million fair value of award The $60 million total compensation is expensed equally over the three-year vesting period, reducing earnings by $20 million each year. The company should adjust the cumulative amount of compensation expense recorded to date in the year the estimate changes. 2012 Compensation expense ([$60 x 95% x 2/3] $20)................... 18 Paid-in capital stock options .............................................. 18 2013 Compensation expense ([$60 x 95% x 3/3] $20 $18)......... 19 Paid-in capital stock options .............................................. 19 Note that this approach is contrary to the usual way companies account for changes in estimates. For instance, assume a company acquires a 3-year depreciable asset having no estimated residual value. The $60 million depreciable cost would be depreciated straight-line at $20 million over the three-year useful life. If the estimated residual 19-1 Chapter 19 Share-Based Compensation and Earnings Per Share Brief Exercise 19-1 Brief Exercise 19-2 Brief Exercise 19-3 Chapter 19 - Share-Based Compensation and Earnings Per Share value changes after one year to 5% of cost, the new estimated depreciable cost of $57 would be reduced by the $20 million depreciation recorded the first year, and the remaining $37 million would be depreciated equally, $18.5 million per year, over the remaining two years. ($ in millions) Cash ($17 exercise price x 12 million shares)....................... 204 Paid-in capital - stock options (account balance)............. 60 Common stock (12 million shares at $1 par per share)..... 12 Paid-in capital excess of par (remainder).................... 252 Note: The market price at exercise is irrelevant. Paid-in capital - stock options (account balance) ........................................ 60 Paid-in capital expiration of stock options ........... 60 The estimate of the total compensation would be: 100,000x $6 = $600,000 options fair estimated expected value total to vest compensation One-third of that amount, or $200,000, will be recorded in each of the three years. The new estimate of the total compensation would change to: x $6 = $0 options fair estimated expected value total to vest compensation In that case, Farmer would reverse the $200,000 expensed in 2011 because no compensation can be recognized for options that dont vest due to performance targets not being met, and thats the new expectation....
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This note was uploaded on 03/29/2011 for the course ACC 311 taught by Professor Debruine during the Winter '08 term at Grand Valley State University.

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Copy of Chap019solutions2011 - Chapter 19 - Share-Based...

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