FAR-F7-M3-Stock Compensation

Question 1

What are stock options?

Answer 1

Stock options give employees the right to purchase their employers stock at a fixed price after working for the company for a period of time.

Question 2

What is the difference between the grant date, the vesting date and the service period?

Answer 2

The grant date is the date the options are awarded.
The vesting date is the date in the future when the employee can actually exercise the option.
The service period is the amount of time from grant date to vesting date.

Question 3

When is compensation expense calculated?

Answer 3

The compensation expense is calculated on the grant date of the options and is allocated over the service period. The service period is the vesting period, which is the time between the grant date and the vesting date.

Question 4

How is total compensation expense amortized over the service period?

Answer 4

Total compensation expense is amortized on a straight line basis over the service period. Important to remember that compensation expense relative to stock options is recognized regardless of whether the option is exercised.

Question 5

How is total compensation cost calculated?

Answer 5

total compensation cost = market price of the share on grant date * # of restricted shares awarded.

Question 6

How is annual compensation expense calculated?

Answer 6

Total compensation cost / service period = annual compensation expense.

Question 7

What are the JEs to record compensation expense?

Answer 7

JE to record compensation expense per year:
Dr. Compensation Expense XXX
Cr. APIC - Stock options (XXX)

Question 8

What are the JEs to record the exercise of stock options?

Answer 8

Dr. Cash (@strike price) XXX
Dr. APIC - stock options (reverse) XXX
Cr. Common stock (@ par value) (XXX)
Cr. APIC (plug) (XXX)