 Hello and welcome to the session. This is Professor Farhad in which we would look at an exercise that illustrate the concept of Restricted stocks. It's a form of compensation Adam company issues 20,000 shares of its restricted stocks to its CFO Maggie on January 1st 20 x 0 The stock has a fair value of a million dollar on that date the service period related to the restricted stock is five years Vesting will occur if Maggie stays with the company until December 31st 20 x 4 Let's basically illustrate what we are to what we are given here. So we're looking at a time period x 0 x 1 x 2 x 3 and x 4 those are the four five periods five periods. We granted the options here Maggie has to stay all that those five years and if she stays she will get 20,000 shares of the company stocks guaranteed We don't know what the value will be at that point But the value today is a million dollar The value at the end of the year at the end of year one at the end of year zero or year one for our purpose is 800,000 that's distractor it does not matter we record on the grand date We record the entry based on the value of the stock on that date So we're gonna record something called unearned Compensation a million dollar What is that million dollar the fair value? What type of account is unearned compensation? It's a contra Equity it's an equity account, but it's gonna reduce our equity by a million. It's not an expense. It's equity Then we're gonna credit common stock as a foot is showing the stocks 20,000 shares times five dollar power value 100,000 and anything that's left will be a plug to paid in capital and excess of power So this takes place January 1st 20x zero, which is right here before we proceed any further I have a public announcement about my company farhat lectures comm Farhat accounting lectures is a supplemental educational tool That's gonna help you with your CPA exam preparation as well as your accounting courses My CPA material is aligned with your CPA review course such as Becker Roger Wiley Gleam Myles my accounting courses are aligned with your accounting courses Broken down by chapter and topics my resources consist of Lectures multiple choice questions through false questions as well as exercises go ahead start your free trial today No obligation no credit card required Now here's what's gonna happen a year later Once the year has ended now we are ready to start to record our compensation expense Maggie state for a year now We can record the expense So now we're gonna take the million divided by five because it's over a five-year period the expense over five-year period And we're gonna record an expense of 200,000 We debit compensation expense and will start to reduce the unearned compensation by 200,000 now It's very beneficial for restricted stocks to do what to keep track of your unearned Let me write it off your unearned compensation because you're gonna see what what's gonna happen unearned Compensation we started with a million debit Now we credited it 200,000 Okay, now this is at the end of year X zero at the end of year X one will do the same thing We'll debit compensation expense credit unearned compensation again 200,000 at the end of X two will do the same thing we debit compensation expense We credit unearned compensation at the end of year four, which is X three again. We debit Compensation expense we credit unearned compensation. So so far we have reduced unearned compensation by 800,000 and we increased The expense the compensation expense by 800,000 over a four-year period, but here's what happened July 1st 20x4 six month right before Maggie is ready to get those 1 million shares. She left the company Now if Maggie leaves the deal is that's it forget about your restricted stocks What would happen if Maggie left well if Maggie left will have to cancel everything that happened thus far What does that mean? We have to act as if this transaction never took place. Okay? What do we need to do then we need to remove common stock? We need to remove common stock. We need to remove paid in capital Because those two has to be gone. We also have to remove unearned compensation as if unearned compensation never took place, which is easy All what we're looking for is another 200,000 and earn unearned compensation is gone And remember we have a compensation expense of 800,000 We have to reverse this because we recorded the expense now we have to reverse it So let's take a look at what we'll do. We'll debit common stock credit paid in capital thus removing those two We credit unearned compensation 200,000 not 20 200,000 I missed a zero here and by doing so unearned compensation is gone that 1 million is gone and This unearned compensation is gone. What's left is compensation expense that was multiplied by four Well, we have to reverse it. We debit we credit compensation expense 800,000 and all the compensation expense are gone. So notice what happened The journal entry will have to remove everything that you did thus far as if the restricted stock options Never took place removed their effect from anywhere on the financial statements And this is exactly what we did. What should you do now? Go to farhatlectures.com work exercises multiple choice through false questions. That's gonna help you Understand this concept better and get you ready whether you are an accounting student or a CPA candidate. Good luck study hard and stay safe