Baltic Limited is a listed company based in California. OnJanuary 1, 2019, the company granted 10,000 share units to its vicepresident. Each share unit has a contractual service period of fiveyears and a vesting condition based on market performance.
Each share unit is convertible into ordinary shares of BalticLimited as follows:
- If the company’s share price increases by more than the NasdaqComposite index over the five years, each share unit converts into5 shares.
- If the company’s share price increases by less than or equal tothe Nasdaq Composite index over the five years, each share unitconverts into 1 share.
On the grant date, the company’s ordinary shares have a fairvalue of $10 per share.
Management believes the probability of the above scenariosoccurring are 40% and 60%, and uses this information to calculatethe fair value of the share unit award.
The company’s accountant has asked for your help to calculatecompensation costs for these share units so that the appropriatejournal entry can be recorded in 2019.
Ignore the effects of taxes.
Provide the journal entries and calculations to answer thisquestion.
