Magnetic-Optical Corporation offers a variety of share-based compensation plans to employees. Under its restricted stock unit plan, the company on January 1, 2021, granted restricted stock units (RSUs) representing 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. Management's policy is to estimate forfeitures.

Required:

1. Determine the total compensation cost pertaining to the RSUs.

2. Prepare the appropriate journal entry to record the RSUs on January 1, 2021.

3. Prepare the appropriate journal entry to record compensation expense on December 31, 2021.

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

Question

Business

Rowan Lowe

11 September, 16:10

Magnetic-Optical Corporation offers a variety of share-based compensation plans to employees. Under its restricted stock unit plan, the company on January 1, 2021, granted restricted stock units (RSUs) representing 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. Management's policy is to estimate forfeitures.

Required:

1. Determine the total compensation cost pertaining to the RSUs.

2. Prepare the appropriate journal entry to record the RSUs on January 1, 2021.

3. Prepare the appropriate journal entry to record compensation expense on December 31, 2021.

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

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Answers (1)

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Ana Huang · Answer 1

See the explanation for the answers.

Explanation:

1. Total compensation cost is determined as follows;

$22.5 fair value per share

x 4 million shares granted

= $90 million fair value of award

2. There is no entry required

3.

($ in millions)

Compensation expenses ($90 million / 3 years) 30

Paid in capital - restricted stock 30

4.

$22.5 fair value per share

x 4 million shares granted

x 90% 100% - 10% forfeiture rate

= $81 million fair value of award