Magnetic-optical corporation offers a variety of share-based compensation plans to employees. under its restricted stock award plan, the company on january 1, 2013, granted 4 million of its $1 par common shares to various division managers. the shares are subject to forfeiture if employment is terminated within three years. the common shares have a market price of $22.50 per share on the grant date. required:

a)

the total compensation cost pertaining to the restricted shares is $90 million

b)

Total compensation cost is $81 million

Explanation:

Magnetic-Optical Corporation offers a variety of share-based compensation plans to employees. Under its restricted stock award plan, the company on January 1, 2016, granted 4 million of its $1 par common shares to various division managers. The shares are subject to forfeiture if employment is terminated within three years. The common shares have a market price of $22.50 per share on the grant date.

Determine the total compensation cost pertaining to the restricted shares.

Suppose Magnetic-Optical expected a 10% forfeiture rate on the restricted shares prior to vesting. Determine the total compensation cost.

Given that:

common shares market price = $22.50 per share on the grant date

Amount of shares = 4 million = 4000000

Shares price = $1 par common shares

Shares termination years = 3 years

a)

The total compensation cost pertaining to the restricted shares = common shares market price * Amount of shares = 4000000 * 22.5 = 90000000 = $90 million

Therefore, the total compensation cost pertaining to the restricted shares is $90 million

b)

Since the corporation has a forfeiture rate of 10% on restricted shares:

The restricted shares = 10% * $90000000 = 0.1 * 90000000 = 9000000 = $9 million

Total compensation cost = Paid capital - restricted shares = $90 million - $9 million = $81 million

Total compensation cost is $81 million

Question:

The question is not complete. What you need to determine was not stated. Below is the necessary calculation for your question.

(a) Determine the total compensation cost pertaining to the RSU

(b) Prepare the appropriate journal entry to record compensation expenses on December 31, 2013

Answer:

(a) Total compensation cost = $9,000,000

Explanation:

Given data;

Total number of shares = 4,000,000

Fair market value = $22.50

(a) Total compensation cost:

Total compensation cost is calculated using the formula;

Total compensation cost = fair market value * number of shares

= 22.50 * 4,000,000

=$90,000,000

For each year, the compensation cost becomes;

=$90,000,000/3 years

=$30,000,000

(b) See the prepared journal below

Date Particulars Debit Credit

Dec. 31 Compensation expenses $30,000,000

Paid in capital $30,000,000

(restricted stock)

To record compensation expenses