FAR 7_07

  1. What is the purpose of a noncompensatory stock option or purchase plan?
    So that the company can raise additional capital. They would prefer that their employees, who are loyal to the company, purchase the shares, and so offer shares as a discount.
  2. What are the characteristics of a noncompensatory stock purchase plan?
    • The plan must be available to virtually all full-time employees
    • It cannot be available to employees or officers that own a substantial portion of the outstanding stock
    • The offer time is limited
    • The discount is reasonable
  3. True / False: The entity must recognize a compensation expense when stock is offered to employees that is noncompensatory in nature?
  4. True / False: IFRS also offers a slightly modified version of the noncompensation stock purchase plan.
    • False
    • If you’re offering to employees, it has to be compensatory.
  5. What are the journal entry accts for a noncompensatory stock purchase plan and when are they entered?
    • [DR] Cash
    •    [CR] Common Stock (at par)
    •    [CR] APIC (for the difference
    • Entered on the date of sale.
  6. What are compensatory stock options or purchase plans?
    An option offered to employees based on either past or future years of service (vesting or service period), that gives the holder the option (but not the obligation) to purchase a certain number of shares by a certain date (expiration date) at a certain price (strike, exercise or option price)
  7. How are options accounted? What are the journal entry accounts and when are they entered?
    • On the date of issue of the option
    • Determine the fair value of the option using the Black-Sholes model
    • Record the fair value using straight-line method over the service period as compensation expense
    • [DR] Compensation Expense
    •    [CR] APIC – stock options
    • On the date of exercise
    • [DR] Cash (received from employee at the strike price)
    • [DR] APIC – Stock Options
    •    [CR] Common Stock (at par)
    •    [CR] APIC
    • If the options expire
    • [DR] APIC – Stock Options
    •    [CR] APIC
  8. An officer of the company is given options that vest over a 3 year period and can be exercised on 12/31/yr 3. The officer resigns on 12/31/yr 3. What compensation expense is recognized for year 3?
    • The full amount for the year.
    • Compensation expense is recognized regardless of whether the option is exercised, or forfeited.
  9. What are Stock Appreciation Rights (SARs)
    The employee is granted the right to receive an amount equal to the excess of the market price of stock at the exercise date over a predetermined amount (typically the market price at grant date).
  10. What journal entry accounts are used to capture stock appreciation rights? When are the entries made and at which price?
    The entries adjust the amounts per service period based on the market rate at the date of the financial statements. This is spread over the vesting period.
  11. An employee is granted a stock appreciation right of 1,000 shares, current market price $25/share, vesting period of 2 years. By the end of year 1 the stock price increased by $10, and another $5 by the end of year 2. How much compensation expense must be recognized? What are the journal entries?
    • 12/31/y1
    • [DR] Compensation Expense = $10,000 * (1/2) = $5,000
    •    [CR] Stock Appreciation Right – Liability = $5,000
    • 12/31/y2
    • [DR] Compensation Expense = (total increase = $15,000 - $5,000 from year 1 = $10,000) 
    •    [CR] Stock Appreciation Right – Liability = $10,000
  12. Why is a liability account used to capture the expected expenditure for a Stock Appreciation Right?
    • Because the payment will be in cash.
    • If the payment were in stock, APIC would be used.
Card Set
FAR 7_07
Becker Review 2018