As part of its stock-based compensation package, International Electronics granted 28 million stock appreciation rights...
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As part of its stock-based compensation package, International Electronics granted 28 million stock appreciation rights (SARs) to top officers on January 1, 2018. At exercise, holders of the SARs are entitled to receive stock equal in value to the excess of the market price at exercise over the share price at the date of grant. The SARs cannot be exercised until the end of 2021 (vesting date) and expire at the end of 2023. The $1 par common shares have a market price of $47 per share on the grant date. The fair value of the SARs, estimated by an appropriate option pricing model, is $3 per SAR at January 1, 2018. The fair value reestimated at December 31, 2018, 2019, 2020, 2021, and 2022, is $4, $3, $4, $2.50, and $3, respectively. All recipients are expected to remain employed through the vesting date. Required:
1-a. Will the SARs be reported as debt or equity? 1-b to 4. Prepare the appropriate journal entries pertaining to the SARs on January 1, 2018 and December 31, 2018December 31, 2021. Assuming the SARs remain unexercised on December 31, 2022, prepare the appropriate entry. Prepare the entry when the SARs are exercised on June 6, 2023, when the share price is $50.
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