 Hello and welcome to the session in which we will discuss restricted stock. What is the big idea of restricted stock? Restricted stock is a form of a compensation plan. It's basically when the company grant Transfer the company stock subject to certain limitation to their employees. What are those limitation? Usually there's a time restriction. What does that mean? It means the company will give you stocks But guess what you don't have access to those stocks You can't do anything with them unless you work for us three five seven years So it's a form of compensation or rewarding the employees. Well, this sounds like what we talked about in the prior session Options so what is the difference between options and restricted stocks? Well, the best way to illustrate the concept I'm gonna go back to my wife's example and show you Johnson and Johnson restricted stock award and compare it to option But the bottom line is it's used To compensate the employee. That's the main idea. So let's go back to the Johnson and Johnson brochure Then we'll come back to this recording in the previous session We talked about options and if you scroll down right after options Also, Johnson and Johnson reward you with something called restricted shares unit or restricted stocks That's what that's basically what it is. So what is the difference between the two? Well, let's take a look at the restricted stocks then we'll compare two options With restricted stocks an RSU becomes a share of Johnson and Johnson on the vesting date Simply put if you wait enough and the vesting period is three years simply put Johnson and Johnson If you work for Johnson and Johnson three years, you wait three years We're gonna give you the we're gonna give you the stocks regardless of what the stock price is you will get the stock guaranteed Versus the stock option under a stock option. You only make a profit if the stock is above the grand date The grand date price, which is we assume in our example one hundred dollar But under a stock Restricted stock you'll get the full stock. You don't doesn't matter whether the stock is fifty dollars one hundred or one hundred and fifty The stock is yours. So for example, if you are granted an RSU and the market price It's one hundred dollar when the RSU vest, which is three years later You would own a full share of the price You are free to hold sell do whatever you want with it if our stock price rose to 130 The stock value is 130 and usually when they give you RSU's they're lower than the stock option So if they gave you 100 RSU, they give you 1000 options because the options remember You have to pay to buy the stock at a certain price RSU you are guaranteed the stock price. However, you have to wait now Why the RSU becoming more and more popular form of compensation This is like off the record not off the record. I'm gonna go here on a tangent If you remember in the prior session, I spoke about the 2019-98 to 2001 Dot-com era and what happened is many executives what they did They want to work for those companies and as soon as the option vested They exercise the options then they left that eventually the company went down. So restricted stocks You don't have to drive the stock price up You have no incentive because you are guaranteed the stock price. So it doesn't give the executive the Motivation the incentive to cook the books to drive the stock price up because you are guaranteed the stock price You are guaranteed the stock regardless what the price is not the stock price You are guaranteed the stock. So that's why our RSU's are less risky And it doesn't give the incentive for the managers to do what to manipulate the stock price Because you're gonna get the stock just wait and you will get the stock and in most In most countries once an RSU vested You are free to hold sell the stock would know for the restriction once again because Johnson and Johnson is an international company You know, there are maybe certain rules in certain countries and this brochure is in English And by the way when Johnson and Johnson grants those Options and RSU's they ask you to select whether you want 100% options 100% RSU's 50 50 25 75 So on and so forth, but this is beside the point So let's go back to our presentation. Why stock restricted are used Well, they are used because they why why why they are popular because as long as you wait You are guaranteed as long as you wait and also you tie the employee performance to the company's performance So what you're doing is well of the stock does well and I own the stock I do well as well Again, generally companies would grant less restricted stock than options because you have to pay for the options That's why they grant you more options and options obviously from a risk perspective The riskier because if you if you said I want to take the options and the stock price fall below the exercise price Then your options are worthless versus restricted stock even if the price is $2. Nevertheless, you got $2 Now the best way to illustrate this is to actually look at an example illustrating the journal entries Before we look at an example I would like to remind you whether you are an accounting student or a CPA candidate to take to take a look at my website farhatlectures.com I don't replace your CPA review course I don't replace your accounting course my motto is saving CPA candidate and accounting students one at a time How I provide you resources lectures exercises through false multiple choice That's gonna help you do better This is a list a partial list of all the courses that I cover my CPA resources are aligned with your backer Wiley Roger in Gleam, so it's very easy to go back and forth between my material and your CPA review course I also give you access to 1500 previously AI CPA released questions for far rag audit and BEC if you have not connected with me on LinkedIn Please do so take a look at my LinkedIn recommendation like this recording on YouTube It will help me tremendously Connect with me on instagram. I'm trying to grow my instagram followers facebook twitter and reddit The best way to illustrate restricted stocks is to actually look at an example on january 1st 20x 3 Farhat lectures my company issues 10 000 shares of restricted stock to its executive Jihan Namur Farhat lecture stock has a fair value of 25 dollar on january 1st 2023 The service and investing period is five years So I expect this executive to work five years and after five years they will get 10 000 shares of the stock Although the fair value right now is 25 Five years later. It could be 200 per share. So what entries do we make? Well, the first thing we do is we debit unearned compensation expense 250 000 simply put what I'm doing is I'm starting to record the restricted stock So I debit an account called unearned compensation. How did I come up with 250 000? Well, that's 10 000 shares times 25 dollars This account is a contra equity. So it reduces my equity by 250 Then I credit common stock as usual the number of shares I'm going to be issuing times the par value of a dollar the remainder goes to paid in capital 240 000 So on the grand date, this is what I do simply put equity went down This is contra equity equity went up There is no effect the total is no effect on equity no effect on the income statement simply put I am recording the fact I'm going to be issuing equity later down the road Then a year later december 31st 2003 Assuming jihann kept working for the company. I would record compensation expense now now I'm gonna hit the compensation. I'm gonna hit the income statement. I'm gonna debit compensation expense 50 000 credit unearned revenue compensation 50 000. So what I'm doing? I'm taking this 250 000 and I'm gonna spread it over five years Expensing 50 000 each year. So this entry would repeat itself for the next four years So year one. This is year one year two will be the same entry. I will expense another 50 000 reduce unearned unearned compensation another 50 000 year three year four and year five Now let's assume That jihann leaves far hat lectures on january 15 20 x 5 so she worked 20 x 3 20 x 4 At the beginning of 20 x 5 before I recorded any expense jihann left So what do I have to do if that happens if jihann leaves before their restricted stocks are Are mature mature? It means they are vested. I have to reverse everything that I did up to this point What does that mean? Let's see what's gonna happen. First, let's take a look at our unearned compensation If we look at unearned compensation this account here. We started it at 250 And I debit it 50 000 for year one and I debited it 50 000 for year two which is 2003 and 2004 Here's what's gonna happen. First, I'm gonna have to remove the fact that I I wanted to issue 10 000 of common stock I will debit common stock 10 000 so common stock this account is gone I have to debit paid in capital 240 000 because that's it that deal is gone. I'm gonna have to credit compensation expense 100 000 remember I credited unearned revenue unearned compensation expense year one and year two the debit was the compensation expense therefore I reverse compensation expense so notice in contrast to options In restricted stock you reverse compensation expense. Why? Because I recorded it for year year three and year four Therefore I have to reverse compensation expense Also, I have to remove unearned compensation because my balance and unearned compensation is 150 Because I I used it. I I reduced two years now I have to credit 150 to bring the balance down to zero So simply put what I did I eliminated all the compensation expense all the unearned revenue All the unearned compensation simply put this entry if you look at all the accounts basically as as if nothing happened On january 1st year x3. So basically reverse everything that we did Including compensation expense including compensation expense. What should you do now? The best thing to do is to go to farhatlectures.com And start to work mcqs look at additional resources to learn about this Once again invest in yourself invest in your career. The cpa exam is worth it. Don't short change yourself $30 give give me a try for a month. You find it helpful. You keep it. You don't find it helpful cancel That's it. That's your maximum loss The cpa exam is a great Certification to have it's going to open many doors for you. Good luck study hard and of course stay safe