Stock Options Flashcards Preview

FAR > Stock Options > Flashcards

Flashcards in Stock Options Deck (5):
1

Under the fair-value method of accounting for stock option plans, total compensation recognized

A. Is based on the value of the option at the grant date, adjusted for forfeitures.
B. Equals the net increase in OE after all relevant journal entries are recorded.
C. Is the difference between market price and option price at the grant date.
D. Is unaffected by the option price.

A. Is based on the value of the option at the grant date, adjusted for forfeitures.

The fair value of the option sets the compensation expense to be recognized for each option expected to be vested. Applying the forfeiture rate ensures that only options expected to be vested will be entered into the calculation.

2

In a stock option plan, the estimated forfeitures rate is increased during the second year of a four-year service period. Therefore,

A. the remaining amount of expense based on the new estimate is allocated to years two-four.
B. the new estimate is retroactively applied.
C. Compensation expense for year two causes total recognized compensation expense through year two to be half of total compensation expense using the new estimate.
D. The effect of the change causes a reversal of previously recognized compensation expense.

C. Compensation expense for year two causes total recognized compensation expense through year two to be half of total compensation expense using the new estimate.


Because the FORFEITURE RATE doubled, means the amount that will be recorded to be estimated will be less. So answer two acknowledges that it will be able half in year 2. Which is correct.

The new estimate is used to compute compensation expense on prior years and the year of change. The resulting total amount of expense through the year of change, less the expense already recognized, is the amount of expense recognized in the year of change.
The new estimate continues to be applied in later years.

3

The stockholders of Meadow Corp. approved a stock-option plan that grants the company's top three executives options to purchase a maximum of 1,000 shares each of Meadow's $2 par common stock for $19 per share. The options were granted on January 1 when the fair value of the stock was $20 per share. Meadow determined that the fair value of the compensation is $300,000 and the vesting period is three years. What amount of compensation expense from the options should Meadow record in the year the options were granted?
A. $20,000
B. $60,000
C. $100,000
D. $300,000

C. $100,000

The fair value of a fixed option plan at grant date is the fair value of the option. Typically the fair value of one option is given and that is multiplied by the number of options, but this problem provides the entire fair value. That total fair value is the total compensation expense to be recognized over the service period - the number of years from grant date to vesting. Once the options vest, no more compensation expense is recognized because the manager has provided the necessary service. Compensation expense per year is the total $300,000 compensation expense divided by 3 years, or $100,000 per year.

4

A stock option plan with a positive fair value at grant date caused compensation expense of $50,000 per year to be recorded over the five-year service period. During the exercise period (two years), the stock price never exceeded the option price. Therefore, none of the options was exercised.
Choose the correct statement about the accounting for these options.

A. the contributed capital increase from recording compensation expense is reversed, causing compensation expense to be reduced in the eighth year after grant.
B. The contributed capital increase from recording compensation expense is left intact.
C. The financial statements during the service period are retroactively restated by removing the compensation expense.
D. The compensation expense for later option grants is reduced by the amount recognized on the options that expired.

B. The contributed capital increase from recording compensation expense is left intact

Expiration of stock options does not cause reversal of compensation expense because, at the grant date, the firm did provide value to the employee, given that the option had a fair value at that time.
The expense recognized for stock option plans is not based on the expected value of the employee services; rather, it is based on the value of what was given by the employer to the employee.

5

On which of the following dates is a public entity required to measure the cost of employee services in exchange for an award of equity interests, based on the fair market value of the award?
A. Date of grant.
B. Date of restriction lapse.
C. Date of vesting.
D. Date of exercise.

A. Date of grant.