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Question - Stock Appreciation Rights - Sairah Corporation issues 500,000 stock appreciation rights (SARs) program for eight of its senior level managers. The SARs allow the managers to receive a cash payment after holding the SARs for five years. The value of the SARs is calculated as the difference between the $34 per share market value of 500,000 common shares on the date the SARs were issued and the fair market value on payment date, $50 Sairah estimates that six of eight managers will remain with the company over the five year period and that estimate remained unchanged over the first four years. One manager leaves after year 2, one after year 3, and one in year 5.
The fair value of one SAR unit was estimated using an option pricing model at the end of each year as follows:
End of Year 1 $4
End of Year 2 $1
End of Year 3 $2
End of Year 4 $17
The fair market value of each common share on payment date at the end of year 5 was $50.
Required -
1) Calculate compensation expense for years 1 through to year 5.
2) Make the journal entry to record compensation expense related to the SARs plan for each of years 1 through 5.
3) Make the journal entry to record the payment made to the managers under the SARs program at the end of year 5.
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