Stock Compensation Expense
Self Test
Intermediate Accounting 2
Self Test
Click the “Check Your Answer” box below each problem to reveal the correct answer and explanation.
b. fair market value of the stock and fair market value of the option
c. fair market value of the option and the exercise price
d. the increase in fair market value of the stock over the prior year
Answer
A. Intrinsic value of a stock option is equal to the fair market value of the underlying common stock less the stock option exercise price.
b. the Black Scholes model
c. quantitative models
d. all of the above
Answer
D. All of the above may be used to determine the fair market value of the employee stock option.
3. The annual expense recorded for stock options granted to employees is equal to
a. the fair market value of the underlying common stock
b. the total value of the stock option on the grant date spread over the vesting period
c. the fair market value of the stock option on the vesting date
d. either b. or c., at the option of the company
Answer
B. The expense is the value of the option the employees earn as they work. The fair market value of the option divided by the vesting period equals the annual expense.
b. at the end of each period
c. on the exercise date
d. on the grant date
Answer
D. The stock option expense is computed on the grant date and is not adjusted for future changes in fair market value of the common stock or the stock option.
b. estimated forfeitures
c. changes in fair market value of the stock
d. none of the above
Answer
B. A company is allowed to reduce the estimated stock option expense by estimated forfeitures by employees that are not expected to continue employment through the vesting date. The stock option expense is not adjusted for changes in fair market value of the stock or option during the vesting period.
b. expensed for the total value of the common stock over the vesting period
c. not expensed because there is no intrinsic value
d. adjusted at the end of each period
Answer
B. When shares of stock are granted to employees the full value of the stock granted is expensed over the vesting period. The expense is determined on the grant date and no adjustment is made when the fair market value of the stock changes during the vesting period.
b. total options granted x fair market value of options on the vesting date
c. total options granted x fair market value of options on the grant date
d. total options granted plus estimated forfeitures x fair market value of the option on the grant date
Answer
C. Total stock option expense is equal to total options granted x the fair market value of one stock option on the grant date. This total value is expensed over the vesting period. Estimated forfeitures reduce the total expense (d.)
b. the fair market value of the company’s stock increases
c. the fair market value of the company’s stock does not change
d. the base is higher than the fair market value of the stock when the plan is terminated
Answer
B. Under a stock appreciate right plan, employees are compensated when the company’s stock increased in fair market value. The amount of compensation is determined by the increase in fair market value over a base price stated in the agreement.
b. recorded at the end of the vesting period
c. calculated at the grant date and expensed over the vesting period
d. none of the above
Answer
A. The stock appreciation right expense is determined by the total estimated compensation expense given the fair market value of the common stock at the end of the period. The compensation expense is adjusted like all other accounting estimates based on the fair market value of the common stock price at the end of the period.
b. a debit to paid in capital stock options
c. a credit to cash
d. a debit to common stock
Answer
B. To record a stock option exercise cash is increased (debit) for the amount received from the employee, paid in capital – stock option is reduced (debit) for the amount previously recorded related to the stock options exercised and common stock is issued (credit). Paid in capital – common stock is increased for the amount to make the entry balance.