(4) Performance-Based Share Option CompensationPlan

On January 1, 2016, Pierce Company establishes aperformance-based share option plan for its 80 top executives. Theterms of the plan are that each executive is granted a maximum of200 options after completing a 3-year service period. The exactnumber of options granted, however, depends on the percentageincrease in sales over the 3-year period. The terms are: (1) ifsales increase between 0% and 3%, each executive is granted 90options; (2) if sales increase between 4% and 6%, each executive isgranted 140 options; and (3) if sales increase at least 7%, eachexecutive is granted the maximum number of options. Each optionentitles the executive to acquire one share of the company’s $10par common stock at a price of $45. The options expire at the endof 4 years.

On the grant date, Pierce uses an option pricing model toestimate that the fair value of each share option is $15.50.Pierce’s employee turnover rate is expected to be 16% over theservice period. At the end of 2017, because of lower turnover,Pierce revises its estimated turnover rate to 14% for the serviceperiod. At the end of 2018, options vest for 68 executives. OnFebruary 3, 2019, 50 executives exercise their options when themarket price of the company’s common stock is $62 per share. Duringthe remainder of the year, the market price declines so that at theend of 2019 the other 18 executives allow their options toexpire.

Based on a projection of past trends, on the grant date Pierceestimates that its sales will increase about 5% by the end of 2018.This estimate appears accurate through 2017. However, in the lasthalf of 2018, sales increase so much that at the end of 2018 Piercedetermines that its total sales have increased by 7% over the3-year service period. All inventory is shipped by Pierce to itscustomers under FOB destination terms.

Required:

1.	Prepare a schedule of Pierce’s compensation computations forits compensatory share option plan for 2016 through 2018.
2.	Prepare Pierce’s memorandum and journal entries for 2016through 2019 in regard to this plan.
3.	Show how the account(s) related to the plan is (are) reportedin the shareholders’ equity section of Pierce’s December 31, 2017,balance sheet.

CHART OF ACCOUNTS
Pierce Company
General Ledger
ASSETS 111 Cash 121 Accounts Receivable 141 Inventory 152 Prepaid Insurance 181 Equipment 198 Accumulated Depreciation LIABILITIES 211 Accounts Payable 231 Salaries Payable 250 Unearned Revenue 261 Income Taxes Payable EQUITY 311 Common Stock 320 Additional Paid-in Capital on Common Stock 325 Paid-in Capital from Share Options 326 Additional Paid-in Capital from Expired Share Options 331 Retained Earnings	REVENUE 411 Sales Revenue EXPENSES 500 Cost of Goods Sold 511 Insurance Expense 512 Utilities Expense 521 Salaries Expense 522 Compensation Expense 532 Bad Debt Expense 540 Interest Expense 541 Depreciation Expense 559 Miscellaneous Expenses 910 Income Tax Expense

Prepare Pierce’s memorandum entry and the journal entry onDecember 31, 2016 in regard to this plan. AdditionalInstructions

PAGE 1

GENERAL JOURNAL

	DATE	ACCOUNT TITLE	POST. REF.	DEBIT	CREDIT
1
2

Prepare Pierce’s memorandum entry and the journal entry onDecember 31, 2017 in regard to this plan. AdditionalInstructions

PAGE 1

GENERAL JOURNAL

	DATE	ACCOUNT TITLE	POST. REF.	DEBIT	CREDIT
1
2

Prepare Pierce’s memorandum entry and the journal entry onDecember 31, 2018 in regard to this plan. AdditionalInstructions

PAGE 1

GENERAL JOURNAL

	DATE	ACCOUNT TITLE	POST. REF.	DEBIT	CREDIT
1
2

Prepare Pierce’s memorandum entry and the journal entries onFebruary 3, 2019 and December 31, 2019 in regard to this plan.Additional Instructions

PAGE 1

GENERAL JOURNAL

	DATE	ACCOUNT TITLE	POST. REF.	DEBIT	CREDIT
1
2
3
4
5
6

Show how the account(s) related to the plan is (are) reported inthe shareholders’ equity section of Pierce’s December 31, 2017,balance sheet. Additional Instructions

PIERCE COMPANY

Partial Shareholders' Equity

December 31, 2017

1	Contributed Capital:
2

Prepare a schedule of Pierce’s compensation computations for itscompensatory share option plan for 2016 through 2018.AdditionalInstructions

PIERCE COMPANY

Compensatory Share Option Computations

2016 through 2018

1		2016	2017	2018
2	Estimated (actual) total compensation cost
3	Fraction of service period expired	1/3	2/3	3/3
4	Estimated compensation expense to date
5	Previously recognized compensation expense
6	Current compensation expense