Chapter 19 Study Notes Flashcards
Qualified incentive plan
the employer receives no tax deduction at all. If Universal’s plan qualifies, the company will receive no tax deduction upon exercise of the options and thus no tax consequences
Non-qualifying incentive plan
the company deducts the difference between the market vs the exercise price at the exercise date.
restricted stock
shares are rewarded to the employee with restrictions of a certain amount of years
has a date of grant(given)
date of vesting(allowed to sell and exercise)
compensation expense
is determined on the day of grant at market value
stock options
a large part of executive compensation
intrinsic value
difference between market price and option price
stock options should be reported at
fair value, estimated at the grant date
option models should include
exercise price of the option expected term of the option current market price of the stock expected dividends expected risk free rate of return during the term of the option expected volatility of the stock
JE for recording compensation expense
compensation expense xx
Paid in Capital stock option xx
changes in compensation expense recording estimates are
prospective, you don’t go back and change it
entry to expire options
Paid in capital stock options (account balance)
Paid in capital expiration of stock options
JE for exercise of pptions
cash xx
PIC stock options xx
Common stock xx
PIC excess of par xx
qualified incentive plan
employer cannot deduct the expense of the options, but the employee pays no income tax on the options until exercised
non qualified plan
employee pays the income tax on the options when granted, and the employer can deduct the difference between the exercise price and the market price at the exercise date, but they must record a deferred tax asset2
JE:
comp exp 20
PIC 20
Deferred tax asset (40%*x20) 8
Income tax expense 8Je for Non qualified plan when the tax benefit is greater than the deferred tax asset
Inc taxes pay ((50-35)10m40%) 20
Deferred Tax Asset 32
Paid in capital tax effect of stck opt 28
JE for Non qualified plans when the tax benefit is less than the deferred tax asset
Inc tax Pay 20
PIC 12
Deferred tax asset 32
cliff vesting
when the shares become vested on a single date
graded vesting
when the options are awarded by percentage each year
In order to book plan performance stock options it must be
probable we will meet it, if options are not exercised when we assumed they would be, we must go back and decrease the expense account
if a target for plan performance is based on changes in the market you
record the compensation regardless of the target
employee share purchase plans
employees can buy stock from the corporation at a discounted price
JE
Cash(discounted price) 850
Compensation Exp 150
Common Stock(market) 1000Rules for determining if an employee purchase of stock should be recorded
a. substantially all employees can participate
b. employees have no longer than one month after the price is fixed to decide whether to participate
c. the discount is no greater than 5% or is justified as reasonable
Stock options when it comes to EPS
do not affect basic EPS are factored into diluted EPS
net income
Basic EPS
net income/WASO
