Stock Compensation Expense
Medium Practice Test
Intermediate Accounting 2
Medium Practice Test
Click the “Check Your Answer” box below each problem to reveal the correct answer and explanation.
b. reduce the total expense each period
c. reduce the exercise price to those that are awarded the options
d. none of the above
Answer
B. The company estimates a forfeiture rate that can be deducted from the total value of options issued and reduce the stock option expense over the vesting period. The fair market value of a stock option is determined using a mathematical model and is not impacted by forfeitures. The exercise price is set and is not impacted by forfeitures.
b. the amount of paid in capital – common stock that is recorded is equal to total value times the % of options that are exercised
c. the total amount of paid in capital – common stock is equal to the amount of cash received
d. the amount of paid in capital – stock option that is recorded is equal to total value of options granted times the % of options that are exercised
Answer
D. Cash equal to the exercise price x number of options exercised is received by the company from the employee (a.). Paid in capital – stock options is removed at the same rate (value per option) it was initially recorded. Common stock is recorded at par value x number of options exercised. Paid in capital – common stock is a plug to balance the entry.
b. stock options issued to employees
c. warrants issued to employees
d. all of the above
Answer
D. Common stock awards are accounted for like all of the above, which are all accounted for using the fair market value method of accounting for stock options.
b. to the total expense each year times the number of years since the grant date
c. to the total value of common stock on the grant date
d. no liability is recorded related to stock options
Answer
D. Granting, expensing, or exercising stock options does not impact liabilities of the company. The obligation to sell the stock at the exercise price potentially increases shareholder’s equity and is not a liability.
b. when the stock options are exercised
c. over the time the employee works for the company and earns the right to exercise
d. none of the above
Answer
C. Stock option expense is recorded using the accrual basis, when earned by the employee over the time period worked.
b. 9 years
c. 13 years
d. 5 years
Answer
A. The vesting period is the time the option is earned by the employee.
b. how much net income increases each period
c. the percentage increase in net income from the grant date
d. the increase to owner’s equity above the base amount on the grant date
Answer
A. A base price is stated in the stock appreciation right agreement. The employee is compensated based on how much higher the fair market value of common stock is than the base price that is stated in the agreement. Net income or book owner’s equity is not the basis of compensation.
b. stock option have intrinsic value only
c. no expense and reports stock options in the footnotes only
d. the company should make a choice to expense or disclose stock option expense
Answer
A. Intrinsic value is equal to the fair market value of the common stock less the exercise price. The time value is the expected future increase in the fair value of the common stock. Employees benefit from both intrinsic and time value.
b. reduce the paid-in-capital stock option account
c. increase the paid in capital common stock account
d. both a. and b.
Answer
D. When stock options expire and are not exercised, the expense associated with those options may be reversed. Reversing reduces the expense and the paid in capital stock option account.
b. stock option expense is recognized equally over the time the employee may exercise the stock option
c. paid in capital – common stock is always recorded for the amount of cash received on exercise
d. total paid in capital – stock options is recorded for the total value expected to be earned by the employees
Answer
D. Total value earned is divided by the vesting period and recorded as paid in capital in equal amounts as the employee earns it over the vesting period. FASB 123R requires the expense of the total value of stock options over the vesting period. The expense is recognized over the vesting period, not the exercise period (b.) Paid in capital – common stock is a plug amount and will not be equal to cash received unless the plug is equal to the cash received, which is highly unlikely.
A. Calculate the total value of the options and the expense for each year.
B. Prepare all required journal entries for 1) the grant date, 2) end of the 2nd year, and
3) the beginning of the 4th year
Answer
A. Compute total value granted and calculate annual expense
| FMV of the stock awarded | $7 |
| x # stock granted | x 50,000 |
| Total Compensation value | 350,000 |
| / Vesting period | 3 years |
| Expense for each period | 116,667 |
B. 1) Grant Date: No entry is made
2) End of the 2nd year:
| Stock Option Expense 116,667 Paid In Capital – Stock Option 116,667 |
Beginning of the 4th year – 30% of options are exercised:
| Paid In Capital – Stock Options 105,000 Cash 240,000 Common Stock 15,000 Paid In Capital – Common Stock 330,000 |
PIC–Stock Options: remove the total value x 30% (350,000 x 30%)
Cash: 50,000 total options x 30% exercised x $16 exercise price
Common Stock: 15,000 options exercised x par value of $1
PIC – C. S is always a plug to balance
Record all entries required for the stock compensation.
Answer
Stock awards are accounted for like stock option awards. Total value granted is expensed over the vesting period.
1st – Compute total value granted and calculate annual expense
| FMV of the stock awarded | $14 |
| x # stock granted | x 1,300,000 |
| Total Compensation value | 18,200,000 |
| / Vesting period | 2 years |
| Value each period | 9,100,000 |
| Expected Exercise % | 75% |
| Expense each period | 6,825,000 |
Ignore the change in fair market value
Grant Date:
No entry is made
End of the 1st year and end of the 2nd year:
| Stock Compensation Expense 6,825,000 C.S. – Restricted Shares 6,825,000 |
End of 2nd year – Award of 90% of the shares:
| Common Stock – Restricted Shares 12,285,000 Common Stock 87,750 Paid in Capital – C.S. 12,197,250 |
When the shares are issued to employees the C.S. restricted is removed from the books for the total amount awarded.
(Total value 18,200,000 x 75% x 90% = 12,285,000)
Common stock is always par value x # shares,
PIC is a plug to balance
(1,300,000 x 75% x 90% = 877,500 shares x $0.10 par value)
Restricted shares that were not awarded below the estimated forfeiture amount are removed from the books and the expense is reversed
| Common Stock – Restricted Shares 1,365,000 Stock Compensation Expense 1,365,000 |
6,825,000 x 2 = 13,650,000 x 10% not awarded
13. At the beginning of year 1, the company granted 100,000 stock appreciation rights that give employees the right to receive cash of $3 per share for each $1 the fair market value of the company’s stock is greater than $50 at the end of 2 years. The company expects about 10% of the rights to be forfeited. The fair market value of the company’s stock was as follows:
| Beginning of year 1 | $50 |
| End of year 1 | $52 |
| End of year 2 | $47 |
Record the journal entries required at the end of each year.
Answer
| Year 1 | Year 2 | |
| Fair Market Value of stock at the end of the period | 52 | 47 |
| – Base price in the agreement | 50 | 50 |
| Increase in value of stock since agreement | 2 | 0 |
| x number of SARs issued | 100,000 | 100,000 |
| Total estimated amount to be paid at end of agreement | 200,000 | 0 |
| x $ for each $ increase | 3 | 3 |
| x years since plan started/vesting period | ½ | 2/2 |
| Cumulative expense to date | 300,000 | 0 |
| x 90% expected rate of award | 90% | 90% |
| Estimated expense to date | 270,000 | 0 |
| Prior year expense | 0 | 270,000 |
| Current year expense | 270,000 | (270,000) |
Year 1 – no entry at the grant date
Year 1 – end of period
| Stock Appreciation Right Expense 270,000 Stock Appreciation Right Liability 270,000 |
Year 2 – end of period
| Stock Appreciation Right Liability 270,000 Stock Appreciation Right Expense 270,000 |
The stock appreciation right liability account should equal the amount owed at the end of the plan which is 0 because the stock did not appreciate above the base price.
No payment is made to employees.