In order to encourage employee ownership of the company’s $1 par common shares, Washington Distribution permits any of its employees to buy shares directly from the company through payroll deduction. There are no brokerage fees and shares can be purchased at a 14% discount. During March, employees purchased 95,000 shares at a time when the market price of the shares on the New York Stock Exchange was $40 per share.

Required:
Prepare the appropriate journal entry to record the March purchases of shares under the employee share purchase plan.

Dr Cash                                                                 $3,268,000.00

Dr Compensation expense                                   $532,000.00  

Cr Common stock equity($1*95,000)                                              $95,000

Cr paid-in capital in excess of par($40-$1)*95,000                        $3,705,000

Explanation:

The cash received from employees as a result of the options is computed thus:

cash proceeds from options=$40*(1-14%)*95,000

                                                =$40*(1-0.14)*95,000

                                                 =$40*0.86*95,000

                                                 =$3,268,000.00

The 14% discount on share price is to be treated as compensation expense as shown thus:

discount (compensation expense)=14%*$40*95,000

                                                        =$532,000.00  

The appropriate entries would to debit cash with $3,268,000.00 as the increase in cash flows and debit of $532,000 to compensation expense.

The credit would be shown in common stock equity and paid-in capital in excess of par

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