Compensation And Benefits

Question 1

Compensated Absences

Answer 1

Account that accrued the expense for paid days off for employees. Like any other expense, the payment of the compensation needs to be probable and able to be estimated

Question 2

Journal Entry for Compensated Absences

Answer 2

Vacation expense $10,000
Vacation days payable - current $8,000
Vacation days payable - non current $2,000

Question 3

Defined Benefit Plans

Answer 3

The annual retirement benefit is defined. The big thing with these is the annual pension expense and the ending liability.

Question 4

5 components of pension expense

Answer 4

\+ service cost
\+ interest cost
- expected return on plan assets
\+/- Amortization of prior service cost
\+/- Amortization of net gain or loss

This is an income statement item

Question 5

Service cost

Answer 5

Increase in PBO based on what employees earn in the current year.

Question 6

Interest cost

Answer 6

The growth in PBO based on interest accruing. This is the PBO at beg of year * the discount rate

Question 7

Expected return on plan assets

Answer 7

Beg balance of plan assets * the expected rate of return

Question 8

Basic formula of PBO

Answer 8

Beginning PBO
\+ Service cost
\+ Interest cost
\+ Prior service cost 
- Prior service credit
\+/- Liability gain or loss
= Ending PBO

Balance sheet item

Increase in PBO = PBO loss
Decrease in PBO = PBO gain

Question 9

Stock Options

Answer 9

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 10

Grant Date

Answer 10

This is the date the options are awarded to the employee

Question 11

Vesting date

Answer 11

This is the date in the future when the employee can actually exercise the option

Question 12

Service period

Answer 12

The amount of time from grant date to vesting date.

Question 13

Compensation expense

Answer 13

This is the expense recognized during the service period

Question 14

Total compensation expense

Answer 14

Will be equal to the fair value of the options expected to be exercised.

Amortized on a straight line basis over the service period. If an estimated forfeiture rate changes, then so does compensation expense.

Question 15

Fair value is measured

Answer 15

At the grant date using an option pricing model (black scholes)

Question 16

Change in compensation expense is recognized

Answer 16

In the current year, no prior years’ compensation expense is changed.

Question 17

Performance based Options

Answer 17

These are options that require some performance target is met before the options will vest. The change in expected number of options to be exercised is treated the same way as changes in forfeiture rate.

Question 18

Expiration of Options

Answer 18

With fixed options, if the options expire un-exercised, there is no reversal of the compensation expense.

With performance-based options, if the performance criteria is not met and no options are exercised, then the compensation expense that was recognized IS reversed.

Question 19

Stock Awards

Answer 19

When an employee is given a stock award, the stock is restricted until the stock vests. Total compensation expense is the fair value of the stock on the date that the employee receives the “award”.
The employee does not own the stock until the award vests.
Compensation expense is recognized over the service period.
If the award doesn’t vest, then the compensation expense is reversed.

Question 20

Stock appreciation rights

Answer 20

This is a form of stock compensation that pays an employee an amount equal to the increase in the stock price between a grant date and exercise date.

If cash will be paid, a liability is recorded ‘SAR liability’