Stock Options

Question 1

What are the requirements for a stock option plan to be considered noncompensatory plan?

Answer 1

1. ) Essentially all employees can participate
2. ) Employee must decide within one month of the firm setting the price for the stock whether to enroll
3. ) Discount does not exceed the employer cost savings inherent in issuing directly to employees (

Question 2

What is a stock option plan?

Answer 2

Provides an employee with the option to purchase shares of employer firm stock at a fixed price in the future, after a reasonable service period. The options expire after a certain time period

Question 3

What is “cliff” vesting?

Answer 3

When all options vest at the same time

Question 4

What are the six variables used in Option-pricing models for stocks?

Answer 4

1. ) Exercise Price
2. ) Expected average life of the option (service period + exercise period)
3. ) Current Stock Price
4. ) Expected Volatility of the stock
5. ) Risk free rate of interest
6. ) Dividend Yield at the grant date

Question 5

What is the accounting effect when no stock options are expected to vest because the performance target is not expected to be met?

Answer 5

Reverse compensation expense and the associated owner’s equity account for the amount of expense recognized in previous periods

Question 6

What is the total compensation expense for a fixed stock option plan?

Answer 6

The fair value at grant date of options expected to vest

Question 7

List the acceptable approaches to accounting for graded vested option plans

Answer 7

Treat as one plan or treat each group with different vesting dates as different plans

Question 8

Define “graded vesting plans”

Answer 8

Stock option plans that stagger the vesting dates

Question 9

How is compensation expense determined after a change in estimated forfeitures?

Answer 9

Compensation expense in period of change is the amount resulting in total compensation expense through the period of change that equals the fraction of service period elapsed multiplied by the new estimate of total compensation expense.

Question 10

How are compensation expenses related to stock compensation reported?

Answer 10

Reported as a component of income from continuing operations.

Question 11

What is the net effect of accounting for a fixed option plan (assuming the options do not expire)?

Answer 11

Cash and owners’ equity are increased by the cash paid in by the employees; retained earnings are reduced by the amount of compensation expense recognized

Question 12

What is the accounting effect of the expiration of stock options?

Answer 12

No change in compensation expense or owners’ equity

Question 13

What is the period over which compensation expense is recognized for a fixed stock option plan?

Answer 13

Service period - grant date to first exercisable date

Question 14

How is compensation expense for a fixed stock option plan measured?

Answer 14

Fair value of options granted are estimated using an option pricing model at grant date

Question 15

On what date is total compensation expense determined for a fixed stock option plan?

Answer 15

Grant date

Question 16

Describe the general approach to recognizing compensation expense for a performance option plan.

Answer 16

At end of each period, recompute total compensation expense based on performance level expected to be achieved. Recognize compensation expense for the period in the amount that results in total compensation through the period equaling the fraction of service period elapsed multiplied by the new estimate of total compensation expense

Question 17

What is the accounting effect when there is an expiration of option plans with vesting contingent on meeting a stock price target?

Answer 17

No change in compensation expense or owners’ equity