Restricted stock is a form of executive compensation where non-transferable

shares are issued to employees that come with conditions on the timing of the sale.

As indicated earlier, many companies also use restricted stock (in some cases,
replacing options altogether) to compensate employees. Restricted-stock plans
transfer shares of stock to employees, subject to an agreement that the shares
cannot be sold, transferred, or pledged until vesting occurs. Similar to stock
options, these shares are subject to forfeiture if the conditions for vesting are not
met.

Major advantages of restricted-stock plans are:

1. Restricted stock never becomes completely worthless. In contrast, if the stock

price does not exceed the exercise price for a stock option, the options are
worthless. The restricted stock, however, still has value.

2. Restricted stock generally results in less dilution to existing stockholders.

Restrictedstock awards are usually one-half to one-third the size of stock options.
(For example, if a company issues stock options on 1,000 shares, an equivalent
restricted-stock offering might be 333 to 500 shares. The reason for the difference
is that at the end of the vesting period, the restricted stock will have value, whereas
the stock options may not. As a result, fewer shares are involved in restricted-stock
plans, and therefore less dilution results if the stock price rises.)

3. Restricted stock better aligns the employee incentives with the companies’
incentives.
The holder of restricted stock is essentially a stockholder and should be more
interested in the long-term objectives of the company. In contrast, the recipients of
stock options often have a short-run focus which leads to taking risks to hype the
stock price for shortterm gain to the detriment of the long-term.

The accounting for restricted stock follows the same general principles as
accounting for stock options at the date of grant. That is, the company determines
the fair value of the restricted stock at the date of grant (usually the fair value of a
share of stock) and then expenses that amount over the service period. Subsequent
changes in the fair value of the stock are ignored for purposes of computing
compensation expense.
Example: Assume that on January 1, 2020, Ogden Company issues 1,000 shares of
restricted stock to its CEO, Christie DeGeorge. Ogden’s stock has a fair value of
$20 per share on January 1, 2020.
Additional information is as follows.
1. The service period related to the restricted stock is five years.
2. Vesting occurs if DeGeorge stays with the company for a five-year period.
3. The par value of the stock is $1 per share.

Answer:

Ogden makes the following entry on the grant date (January 1, 2020).

Unearned Compensation 20,000

Common Stock (1,000 × $1) 1,000

Paid-in Capital in Excess of Par – Common 19,000

( giải thích: The credits to Common Stock and Paid-in Capital in Excess of Par—
Common Stock indicate that Ogden has issued shares of stock. The debit to
Unearned Compensation (often referred to as Deferred Compensation Expense)
identifies the total compensation expense the company will recognize over the
five-year period. Unearned Compensation represents the cost of services yet to
be performed, which is not an asset. Consequently, the company reports
Unearned Compensation in stockholders’ equity in the balance sheet, as a contra
equity account (similar to the reporting of treasury stock at cost)

At December 31, 2020, Ogden records compensation expense of $4,000 (1,000

shares × $20 × .20) as follows.

Compensation Expense 4,000

Unearned Compensation 4,000

Ogden records compensation expense of $4,000 for each of the next four years
(2021, 2022, 2023, and 2024).
Assume that DeGeorge leaves on February 3, 2022 (before any expense has been
recorded during 2022). The entry to record this forfeiture is as follows.
Common Stock (1,000 × $1) 1,000
Paid-in Capital in Excess of Par—Common 19,000
Compensation Expense ($4,000 × 2) 8,000
Unearned Compensation 12,000

( Giải thích: In this situation, Ogden reverses the compensation expense of $8,000
recorded through 2021. In addition, the company debits Common Stock and Paid-
in Capital in Excess of Par—Common Stock, reflecting DeGeorge’s forfeiture. It
credits the balance of Unearned Compensation since none remains when DeGeorge
leaves Ogden. This accounting is similar to accounting for stock options when
employees do not fulfill vesting requirements. Recall that once compensation
expense is recorded for stock options, it is not reversed. The only exception is if
the employee does not fulfi ll the vesting requirement, by leaving the company
before vesting occurs. In Ogden’s restricted-stock plan, vesting never occurred
because DeGeorge left the company before she met the service requirement.
Because DeGeorge was never vested, she had to forfeit her shares. Therefore, the
company must reverse compensation expense recorded to date. )