How do you account for restricted stock compensation, including forfeiture before vesting? This lecture works a restricted stock example for CPA exam FAR candidates and intermediate accounting students, covering the grant date entry, straight-line amortization of compensation expense over the vesting period, and how to reverse the entries when an employee leaves before the shares vest.
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Video Timeline & Key Concepts:
0:00 — Introduction to the restricted stock example
0:33 — Grant date entry: unearned compensation, common stock, and paid-in capital
2:37 — Amortizing compensation expense over the vesting period
4:04 — Reversing entries when the employee leaves before vesting
Frequently Asked Questions:
What is restricted stock?
Restricted stock is stock granted to an employee as compensation that cannot be fully owned until a vesting condition, usually a service period, is met.
How is restricted stock recorded on the grant date?
The company debits unearned compensation, a contra-equity account, for the fair value at grant and credits common stock and paid-in capital.
How is restricted stock compensation expense recognized?
The fair value at grant is expensed on a straight-line basis over the vesting period, debiting compensation expense and crediting unearned compensation each year.
What happens if the employee leaves before vesting?
The company reverses all prior entries as if the grant never happened, removing unearned compensation, the cumulative compensation expense, and the related equity accounts.
Do later changes in the stock price affect the entries?
No. The compensation is measured using the fair value at the grant date, so subsequent changes in the market price are not remeasured.
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