On December 31, 2010, Beckford Company issues 150,000 stock-appreciation rights to its officers entitling them to receive cash for the difference between the market price of its stock and a pre-established price of $10. The fair value of the SARs is estimated to be $4 per SAR on December 31, 2011; $1 on December 31, 2012; $10 on December 31, 2013; and $9 on December 31, 2014. The service period is 4 years, and the exercise period is 7 years. Instructions:(a) Prepare a schedule that shows the amount of compensation expense allocable to each year affected by the stock-appreciation rights plan.(b) Prepare the entry at December 31, 2014, to record compensation expense, if any, in 2014.(c) Prepare the entry on December 31, 2014, assuming that all 150,000 SARs are exercised.

Beckford Company

a) A schedule of Compensation Expense for each year:

Stock-Appreciation Rights (SARs):

Date Due                  SARs        Fair Value  Compensation  Annual %

                                                    of SARs    Recognizable    Expenses

December 31, 2011   150,000      $4            $600,000    $150,000 (25%)

December 31, 2012  150,000      $1                150,000        37,500 (25%)

December 31, 2013  150,000      $10        $1,500,000      375,000 (25%)

December 31, 2014  150,000      $9         $1,350,000      337,500 (25%)

Total SARs Compensation Expense for the 4 years =  $900,000

b) Journal Entry at December 31, 2014 to record compensation expense:

Debit Compensation Expense (SARs) $337,500

Credit SARs Liability $337,500

To record the compensation expense for 2014.

c) Debit Compensation Expense (SARs) $900,000

Credit SARs Liability $900,000

To record the compensation expense for the four years.

Explanation:

a) Data and Calculations:

Stock-appreciation rights = 150,000

Period of exercise = 4 years

Portion exercisable each year = 37,500 (150,000/4)

Pre-established price of SARs = $10

Fair values of the SARs are:

December 31, 2011 = $4

December 31, 2012 = $1

December 31, 2013 = $10

December 31, 2014 = $9

b) Stock Appreciation Rights (SARs), like stock options, compensate Beckford employees during a predetermined period of four years with the difference between the stock's market price and a predetermined price of $10.  Since the SARs are exercisable over four years, the compensation expense is based on the portion of the stock that is exercisable each year (which is 150,000 divided by 4).  It differs from stock options because employees are entitled to a cash payment or stock issuance at the end of the period, whereas employees pay for stock options when they exercise them.

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