Question 1

Which of the following statements regarding stock options is true?

Accepted Answer

C

Question 2

For an equity-classified award,what journal entry is made at the date of grant?

Accepted Answer

A

Question 3

The fair value of stock options on the date of grant is usually readily determinable.

Accepted Answer

False

Question 4

The value of forfeited stock options reduce compensation expense.

Accepted Answer

Forfeited stock options reduce the number of options outstanding, which in turn reduces the compensation expense that the company would have recognized if the options had been exercised. As a result, the value of forfeited stock options can lower the company's compensation expense.

Question 5

If an unexpected forfeiture of options occurs under a stock option plan,the change in compensation is treated as ________.

Accepted Answer

The answer of If an unexpected forfeiture of options occurs...

Question 6

The initial journal entry to record an equity-classified award increases stockholders' equity on the balance sheet.

Accepted Answer

The answer of The initial journal entry to record an...

Question 7

Which of the following statements is true regarding equity classified awards?

Accepted Answer

Contributed capital refers to the capital that shareholders have invested in the company, typically through the purchase of stock, and is not considered donated capital.

Question 8

Compensation expense associated with stock options is ________.

Accepted Answer

The answer of Compensation expense associated with stock options is...

Question 9

A stock option plan is generally revalued whenever there is a change in the estimated percentage of options that will be forfeited.

Accepted Answer

Revaluation of a stock option plan is necessary whenever there is a change in the estimated percentage of options that will be forfeited, as it affects the total number of outstanding options and their fair value.

Question 10

The fixed price paid by an employee to acquire a share of stock under an option plan is the ________.

Accepted Answer

The fixed price paid by an employee to acquire a share of stock under an option plan is known as the exercise price. This is the price agreed upon at the time the option is granted, and it remains fixed for the duration of the option period.

Question 11

An employee will generally exercise stock options only when the current market price is above the exercise price of the option.

Accepted Answer

An employee would generally exercise stock options only when it is profitable to do so, i.e., when the current market price is above the exercise price of the option.

Question 12

An employee who receives an equity-classified award has the right to receive shares of stock.

Accepted Answer

An equity-classified award is a type of stock option that gives the employee the right to receive shares of stock as part of their compensation. Therefore, the statement is true.

Question 13

Which of the following items is not specified by a compensation arrangement?

Accepted Answer

The original stock price is a market variable that is outside the control of the company and is determined by the stock exchange. The other options listed (A, C, and D) are all specified by a compensation arrangement and determined by the company.

Question 14

What is the most important accounting objective for equity classified awards?

Accepted Answer

The correct amount of compensation expense during the service period is the most important accounting objective for equity classified awards. This is because equity classified awards are considered to be a form of employee compensation, and companies are required to recognize the cost of this compensation in their financial statements. This cost is recognized over the service period, which is the time period during which the employee is required to render service in order to become entitled to the award. Measuring the fair value of the awards for balance sheet purposes and disclosing increases and decreases in their value are important as well, but determining the correct amount of compensation expense during the service period is the most critical objective. The change in the number of stock options that will eventually be exercised is not an accounting objective, as it is simply an outcome of the exercise behavior of the award recipients.

Question 15

Equity classified awards should be reported as compensation expense ________.

Accepted Answer

Equity classified awards should be reported as compensation expense using the fair value method, which involves calculating the present value of the award based on the fair value of the company's stock on the date of grant. The expense should be recognized over the vesting period, rather than at the date of grant or exercise.

Question 16

The compensation associated with equity classified awards is ________.

Accepted Answer

The compensation associated with equity classified awards is based on the estimated fair value of the options. This is because the fair value accurately reflects the value of the options at the time of grant, and is the most appropriate measure for recording compensation expense.

Question 17

The first step in measuring compensation expense from granting employee stock options is to determine the fair value on the date of grant.

Accepted Answer

This is correct. Determining the fair value of stock options on the date of grant is the first step in measuring compensation expense.

Question 18

When compensation is recognized under an equity classified award,expiration of stock options is treated as ________.

Accepted Answer

When stock options expire, the balance in the additional paid-in capital from stock options is typically reclassified within shareholders' equity, often to retained earnings, as it no longer represents potential future equity.

Question 19

List and explain the factors that are important in accounting for stock-based compensation plans.

Accepted Answer

The answer of List and explain the factors that are...

Question 20

The initial journal entry to record an equity-classified award serves as a disclosure for a stock option plan.

Accepted Answer

The initial journal entry to record an equity-classified award, such as a stock option plan, serves as a disclosure in the company's financial statements. This entry reflects the fair value of the award and provides information about the terms and conditions of the equity-based compensation plan.

Quiz 20: Accounting for Employee Compensation and Benefits