PHN Foods granted 18 million of its no par common shares to executives, subject to forfeiture if employment is terminated within three years. The common shares have a market price of $5 per share on January 1, 2017, the grant date. Required: 1. What journal entry will PHN Foods prepare to record executive compensation regarding these restricted shares at December 31, 2017 and December 31, 2018? 2. When calculating diluted EPS at December 31, 2018, what will be the net increase in the denominator of the EPS fraction if the market price of the common shares averages $5 per share during 2018?

The $12 million is the net increase in the denominator of the EPS fraction if the market price of the common shares averages $5 per share during 2018.

Explanation:

1. The journal entry is shown below:

For December 31, 2017:

Compensation Expenses A/c Dr ($18 million * $5 per share) : 3 = $30 million

To Restricted Shares $30 million

(Being compensation expenses recorded for 2017 year)

For December 31, 2018:

Compensation Expenses A/c Dr ($18 million * $5 per share) : 3 = $30 million

To Restricted Shares $30 million

(Being compensation expenses recorded for 2018 year)

2. The net increase in the denominator of the EPS fraction for 2018 year is shown below:

= 2018 shares - Restricted shares

= $30 million - $18 million

= $12 million

Hence, the $12 million is the net increase in the denominator of the EPS fraction if the market price of the common shares averages $5 per share during 2018