Stock Compensation Expense
Easy Practice Test
Intermediate Accounting 2
Easy Practice Test
Click the “Check Your Answer” box below each problem to reveal the correct answer and explanation.
b. fair market value of the common stock less fair market value of the option
c. fair market value of the option less the exercise price
d. fair market value of the common stock less the exercise price
D. The definition of intrinsic value is the fair market value of common stock less the exercise price on the grant date.
b. for the amount of the intrinsic value granted on the grant date
c. at the expiration date of the stock options
d. on the exercise date
B. Companies must record an expense on the grant date for intrinsic value of options granted. Intrinsic value is the fair value of the common stock less the exercise price. Most companies set the exercise price equal to the fair value of common stock on the grant date to avoid the expense of intrinsic value on the grant date.
b. expected fair market value of the stock on the expected exercise date
c. fair market value of the option
d. fair market value of the option plus fair market value of the stock
A. The exercise price is typically set at the fair market value of the common stock on the grant date. This gives no intrinsic value and the employee is compensated based on the increase in the common stock price from the date of the grant.
b. total options granted times the fair market value of the options on the exercise date
c. total options granted times the fair market value of the options on the grant date
d. total fair market value of stock plus total fair market value of the options granted on the grant date
C. Total value granted is equal to total stock options granted multiplied by the fair market value of the stock option on the grant date.
b. total value granted divided by the years the employee has to exercise
c. total value granted divided by the vesting period
d. none of the above
C. The annual expense for stock options is equal to the number of options granted times the fair market value of the stock option ( equals total value granted) divided by the vesting period.
b. date the employee purchases stock from the company at the exercise price
c. date the employee sells stock purchased from the company
d. date the employee has vested the options
B. The exercise date is the date the employee purchases common stock from the company by paying cash per share equal to the exercise price.
b. using the Black Scholes model
c. using a quantitative model that considers factors relative to the stock
d. all of the above can be used to determine fair market value of the option
D. All of the listed methods can be used to determine the fair market value of the stock option which is used to determine the annual expense.
b. paid in capital – common stock is the credit
c. paid in capital -stock option is the credit
d. paid in capital – stock option is the debit
C. To record stock option compensation expense, the expense is debited and paid in capital – stock option is credited.
b. the total value of stock options granted
c. the intrinsic value times the number of options granted divided by the vesting period
d. the total fair market value of the stock on the exercise date
A. The amount reported on the income statement is the expense which is computed as total value of stock options granted divided by the vesting period.
b. employees in stock as the stock price increases
c. employees in cash as the stock price increases
d. either a. or b.
D. The employee is compensated based on the increase in the company’s common stock over and above the base price set in the stock appreciation right agreement. As the common stock increases, the employee earns compensation. The employee can be paid in either common stock or cash as stated in the agreement.
A. Record the required journal entries for the first year.
B. Record the required journal entries at the end of the third year.
Granting restricted stock is expensed over the vesting period. Subsequent changes in fair market value of the stock are ignored. It is accounted for much like a stock option.
1st – Compute total value granted and calculate annual expense
|FMV of the stock awarded||$15|
|x # stock granted||x 1,000,000|
|Total Compensation value||15,000,000|
|/ Vesting period||3 years|
|Expense for each period||5,000,000|
A. Grant Date: No entry is made
End of the 1st year
|Stock Compensation Expense 5,000,000
C.S. – Restricted Shares 5,000,000
B. End of the 3rd year:
Stock Compensation Expense 5,000,000
Common Stock – Restricted Shares 15,000,000
When the shares are issued to employees, the C.S. restricted is removed from the books for the total amount previously recorded.
Common stock is always par value x # shares, PIC is a plug to balance
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 exercise of the stock options
A. Compute total value granted and calculate annual expense
|FMV of the stock awarded||$6|
|x # stock granted||x 180,000|
|Total Compensation value||1,080,000|
|/ Vesting period||4 years|
|Expense for each period||270,000|
1) Grant Date: No entry is made
2) End of the 2nd year:
|Stock Option Expense 270,000
Paid In Capital – Stock Options 270,000
3) Exercise of stock options:
|Paid In Capital – Stock Options 1,080,000
Common Stock 475,000
Paid In Capital – Common Stock 9,245,000
PIC – Stock Options: remove the total value when all options are exercised
Cash: number of options exercised x exercise price (180,000 x $48)
Common Stock: options exercised x par value (180,000 x $2.50)
PIC – C.S.: always a plug to balance
13. At the beginning of year 1, the company granted 100,000 stock appreciation rights that give employees the right to receive cash of $1 per share for each $1 the fair market value of the company’s stock is greater than $30 at the end of 2 years. The fair market value of the company’s stock was as follows:
|Beginning of year 1||$30|
|End of year 1||$33|
|End of year 2||$38|
Record the journal entries required at the end of both years the stock appreciation plan is in place.
|Year 1||Year 2|
|Fair Market Value of stock at the end of the period||33||38|
|– Base price in the agreement||30||30|
|Increase in value of stock since agreement||3||8|
|x number of SARs issued||100,000||100,000|
|Total estimated amount to be paid at end of agreement||300,000||800,000|
|x years since plan started/vesting period||1/2||2/2|
|Cumulative expense to date||150,000||800,000|
|– Expense recognized in prior years||0||150,000|
|Expense this year||150,000||650,000|
Year 1 – no entry at the grant date
Year 1 – end of period
|Stock Appreciation Right Expense 150,000
Stock Appreciation Right Liability 150,000
Year 2 – end of period
Stock Appreciation Right Expense 650,000
Stock Appreciation Right Liability 800,000
The stock appreciation right liability account should equal what is owed at the end of the plan. Payment reduces the liability to 0.