Deck 19: Accounting for Employee Compensation and Benefits

Question 1

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

Answer 1

True

Question 2

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

Answer 2

True

Question 3

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

Answer 3

False

Question 4

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

A) a prior period adjustment
B) an adjustment to compensation expense
C) a reclassification of shareholders' equity
D) a change in accounting estimate

Question 5

The compensation associated with equity-classified awards of stock options is ________.

A) the estimated book value of the options
B) the estimated fair value of the options
C) allocated to compensation expense until the options expire
D) recorded as compensation expense when the options are granted

Question 6

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

A) No journal entry is prepared.
B)
Compensation Expense
APIC-Stock Options
C)
Deferred Compensation
Common Stock
D)
Compensation Expense
Deferred Compensation

Question 7

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

Question 8

The value of stock options expected to be forfeited reduce compensation expense.

Question 9

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

A) a change in estimate
B) an adjustment to additional paid in capital
C) an adjustment to deferred compensation
D) a change in other comprehensive income

Question 10

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

Question 11

On January 1, Year 1, Fields Corporation granted 500,000 stock options to certain executives. The options are exercisable no sooner than December 31, Year 3 and expire on January 1, Year 7. The vesting period is 3 years. Each option can be exercised to acquire one share of $10 par common stock for $15. An appropriate option-pricing model estimates the fair value of each option to be $12 on the date of grant. What amount should Fields recognize as compensation expense for Year 1?

A) $0
B) $2,000,000
C) $750,000
D) $6,000,000

Question 12

Which of the following items is generally not specified by a compensation arrangement involving stock options?

A) number of options granted
B) current market price
C) exercise price
D) vesting period

Question 13

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

A) exercise price
B) market price
C) historical price
D) book price

Question 14

Compensation expense associated with stock options is ________.

A) based upon the book value of the options
B) based upon the estimated fair value of the options
C) recorded on the date that the options are granted
D) allocated as expense over the time period until the options expire

Question 15

What is the effect of an equity-classified award of stock options on the grant date?

A) no change in total equity or net income
B) increase in total equity and increase in net income
C) decrease in total equity and decrease in net income
D) increase in total equity and decrease in net income

Question 16

List and explain the terms that are required to account for the issuance of stock options.

Question 17

Which of the following statements regarding stock options is true?

A) An employee will exercise a stock option only when the current market price of the stock is less than the option price.
B) Unexercised options may be sold or transferred in the open market.
C) Employee stock options are a restricted form of a call option.
D) Companies expense stock-based compensation at the fair value of the stock on the expected date of exercise.

Question 18

Among Fortune 500 companies, which of the following compensation plans is most common?

A) stock options
B) profit-sharing
C) employee stock ownership
D) deferred compensation

Question 19

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

Question 20

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

Question 21

When a company grants a liability-classified award, it does not make an entry at the grant date.

Question 22

An employee will not redeem a liability-classified award when the market price is less than the exercise price.

Question 23

Schmidt Electronics offered an incentive stock plan to its employees. On January 1, Year 1, 120,000 options were granted for 120,000 $1 par common shares. The exercise price equals the $6 market price of the common stock on the grant date. The vesting period is 3 years. The options cannot be exercised before January 1, Year 4, and expire on December 31, Year 5. Each option has a value of $3 based upon an option pricing model. What is the entry to record the expiration of 15% of the options on December 31, Year 5?

A) $$\begin{array} { | c | r | r | } \hline \text { APIC-Stock Options } & 54,000 & \\\hline \text { APIC-Expired Stock Options } & & 54,000 \\\hline\end{array}$$
B) $$\begin{array} { | c | r | r | } \hline \text { APIC-Stock Options } & 54,000 & \\\hline \text { Retained Earnings } & & 54,000 \\\hline\end{array}$$
C) $$\begin{array} { | c | r | r | } \hline \text { APIC-Stock Options } & 54,000 & \\\hline \text { Compensation Expense } & & 54,000 \\\hline\end{array}$$
D) $$\begin{array} { | l | r | r | } \hline \text { Stock Options Receivable } & 90,000 & \\\hline \text { Common Stock } & & 30,000 \\\hline \text { APIC } & & 60,000 \\\hline\end{array}$$

Question 24

On January 1, Year 1, Fields Corporation granted 200,000 stock options to certain executives. The vesting period is 3 years. The options are exercisable no sooner than December 31, Year 3 and expire on January 1, Year 7. Each option can be exercised to acquire one share of $10 par common stock for $15. An appropriate option-pricing model estimates the fair value of each option to be $11 on the date of grant. Fields chooses to adjust the fair value of the options for the estimated forfeitures. If unexpected turnover in Year 2 caused Fields to estimate that 12% of the options would be forfeited, what amount of compensation expense should Fields recognize in Year 2? (Round intermediate calculations and your final answer to the nearest dollar.)

A) $0
B) $1,290,667
C) $733,333
D) $557,334

Question 25

On January 1, Year 1, Davenport Corporation granted an employee 10,000 options to purchase 10,000 shares of Davenport's $10 par common stock at $30 per share. The options became exercisable on December 31, Year 3, after the employee completed three years of service. The option was exercised on February 1, Year 4. The market prices of Davenport's stock were as follows: January 1, Year 1, $40; December 31, Year 3, $60; and February 1, Year 4, $55. An options pricing model estimated the value of the options at $20 each on the grant date. For Year 1, Davenport should recognize compensation expense of ________. (Do not round intermediate calculations. Only round your final answer to the nearest dollar.)

A) $0
B) $66,667
C) $100,000
D) $200,000

Question 26

The carrying value of liability-classified awards is not adjusted for changes in fair value.

Question 27

Which of the following is not a situation in which employee compensation is classified as a liability?

A) The option is granted for the acquisition of securities classified as equity securities.
B) The option is granted for the acquisition of securities classified as liabilities, such as redeemable preferred stock.
C) The employee can sell back the acquired shares to the employer corporation at the exercise price within a reasonable period of time.
D) The compensation is in the form of cash-settled stock appreciation rights.

Question 28

Schmidt Electronics offered an incentive stock plan to its employees. On January 1, Year 1, 90,000 options were granted for 90,000 $1 par common shares. The exercise price equals the $6 market price of the common stock on the grant date. The vesting period is 3 years. The options cannot be exercised before January 1, Year 4, and expire on December 31, Year 5. Each option has a value of $3 based upon an option pricing model. At the end of the first year, it is expected that 100% of employees will exercise the options. By the end of Year 2, it is expected that only 80% of the options will be exercised. Schmidt chooses to adjust the
Fair value of the options for the estimated forfeitures.
What is the journal entry to record compensation expense for year 2? (Do not round intermediate calculations. Only round your final answer to the nearest dollar.)

A)
$\begin{array}{llcc} \text {Deferred Compensation } &54,000 \\ \text { Compensation Expense}&&54,000 \\\end{array}$

B)
$\begin{array}{llcc} \text {Compensation Expense } &216,000\\ \text { Deferred Compensation } &&216,000\\\end{array}$

C)
$\begin{array}{llcc} \text { Compensation Expense } &54,000\\ \text { APIC - Stock Options }&&54,000 \\\end{array}$

D)
$\begin{array}{llcc} \text {Compensation Expense } &54,000 \\ \text { Deferred Compensation } &&54,000\\\end{array}$

Question 29

Schmidt Electronics offered an incentive stock plan to its employees. On January 1, Year 1, 110,000 options were granted for 110,000 $1 par common shares. The exercise price equals the $6 market price of the common stock on the grant date. The vesting period is 3 years. The options cannot be exercised before January 1, Year 4, and expire on December 31, Year 5. Each option has a value of $4 based upon an option pricing model. What is the fair value of the award?

A) $110,000
B) $330,000
C) $440,000
D) $660,000

Question 30

On January 1, Year 1, Fields Corporation granted 300,000 stock options to certain executives. The vesting period is 3 years. The options are exercisable no sooner than December 31, Year 3 and expire on January 1, Year 7. Each option can be exercised to acquire one share of $10 par common stock for $15. An appropriate option-pricing model estimates the fair value of each option to be $13 on the date of grant. What is the fair value of the award?

A) $3,900,000
B) $3,000,000
C) $900,000
D) $4,500,000

Question 31

Walker, Incorporated
Walker, Incorporated uses stock options as a compensation incentive for its top executives. On January 1, Year 1, 25,000 options were granted, each giving the holder the right to acquire one $5 par common share. The exercise price is $60 per share. The vesting period is 4 years. Options vest on January 1, Year 5 and cannot be exercised before that date and will expire on December 31, Year 8. The fair value of the 25,000 options, estimated by an appropriate option pricing model is $50 per option.

-Refer to Walker Corporation. On April 1, Year 7, when the market price of Walker's stock was $20 per share, 15,000 of the options were exercised. Make the appropriate journal entry to record this transaction.

Question 32

Walker, Incorporated
Walker, Incorporated uses stock options as a compensation incentive for its top executives. On January 1, Year 1, 25,000 options were granted, each giving the holder the right to acquire one $5 par common share. The exercise price is $60 per share. The vesting period is 4 years. Options vest on January 1, Year 5 and cannot be exercised before that date and will expire on December 31, Year 8. The fair value of the 25,000 options, estimated by an appropriate option pricing model is $50 per option.
Refer to Walker Corporation. Make the journal entries to record compensation expense for Year 1.

Question 33

Schmidt Electronics offered an incentive stock plan to its employees. On January 1, Year 1, 90,000 options were granted for 90,000 $1 par common shares. The exercise price equals the $6 market price of the common stock on the grant date. The vesting period is 3 years. The options cannot be exercised before January 1, Year 4, and expire on December 31, Year 5. Each option has a value of $3 based upon an option pricing model. At the end of the first year, it is expected that 100% of employees will exercise the options. By the end of Year 2, it is expected that only 80% of the options will be exercised. Assume that Schmidt chooses to adjust the fair value of the options for the estimated forfeitures.
What is the journal entry to recognize compensation expense and record the change in vesting probability in Year 2? (Do not round intermediate calculations. Only round your final answer to the nearest dollar.)

A)
$\begin{array} { l l } \text { Deferred Compensation } & 54,000 \\\text { APIC - Stock Options } &&54,000\end{array}$
B)
$\begin{array}{llcc} \text { Compensation Expense } & 90,000\\\text { Common Stock }&&90,000 \\\end{array}$

C)
$\begin{array} { l l } \text { Compensation Expense } & 54,000 \\\text { APIC - Stock Options } &&54,000\end{array} 54,000$
D)
$\begin{array} { l l } \text { APIC - Stock Options } & 54,000 \\\text { Deferred Compensation } && 54,000\end{array}$

Question 34

When liability-classified stock options expire, additional paid-in capital is increased.

Question 35

Walker, Incorporated
Walker, Incorporated uses stock options as a compensation incentive for its top executives. On January 1, Year 1, 25,000 options were granted, each giving the holder the right to acquire one $5 par common share. The exercise price is $60 per share. The vesting period is 4 years. Options vest on January 1, Year 5 and cannot be exercised before that date and will expire on December 31, Year 8. The fair value of the 25,000 options, estimated by an appropriate option pricing model is $50 per option.

-Refer to Walker Corporation. Assuming that all compensation expense has been recorded, record the journal entry to reflect the expiration of 3,000 options that were never exercised.

Question 36

Schmidt Electronics offered an incentive stock plan to its employees. On January 1, Year 1, 120,000 options were granted for 120,000 $1 par common shares. The exercise price equals the $8 market price of the common stock on the grant date. The vesting period is 3 years. The options cannot be exercised before January 1, Year 4, and expire on December 31, Year 5. Each option has a value of $4 based upon an option pricing model. What is the journal entry to record the exercise of 85% of the options during Year 4 when the market price of the stock was $10?

A) $$\begin{array} { | l | r | r | } \hline \text { Cash } & 816,000 & \\\hline \text { APIC - Stock Options } & 408,000 & \\\hline \text { Common Stock } & & 102,000 \\\hline \text { APIC in Excess of Par - Common } & & 1,122,000 \\\hline\end{array}$$
B) $$\begin{array} { | l | r | r | } \hline \text { Cash } & 816,000 & \\\hline \text { APIC-Stock Options } & 408,000 & \\\hline \text { Common Stock } & & 120,000 \\\hline \text { APIC in Excess of Par - Common } & & 1,104,000 \\\hline\end{array}$$
C) $$\begin{array} { | l | r | r | } \hline \text { Cash } & 408,000 & \\\hline \text { APIC-Stock Options } & 102,000 & \\\hline \text { Common Stock } & & 102,000 \\\hline \text { APIC in Excess of Par - Common } & & 408,000 \\\hline\end{array}$$
D) $$\begin{array} { | l | r | r | } \hline \text { Cash } & 120,000 & \\\hline \text { APIC-Stock Options } & 102,000 & \\\hline \text { Common Stock } & & 120,000 \\\hline \text { APIC in Excess of Par - Common } & & 102,000 \\\hline\end{array}$$

Question 37

Schmidt Electronics offered an incentive stock plan to its employees. On January 1, Year 1, 110,000 options were granted for 110,000 $1 par common shares. The exercise price equals the $6 market price of the common stock on the grant date. The vesting period is 3 years. The options cannot be exercised before January 1, Year 4, and expire on December 31, Year 5. Each option has a value of $5 based upon an option pricing model. What is the journal entry to record compensation expense for Year 1? (Do not round intermediate calculations. Only round your final answer to the nearest dollar.)

A)
$\begin{array}{llcc} \text { Deferred Compensation} &183,333\\ \text {APIC - Stock Options } &&183,333\\\end{array}$


B)
$\begin{array} { l l } \text { Compensation Expense } &183,333\\\text { Common Stock }&& 183,333 \\\end{array}$
C)
$\begin{array}{llcc} \text { Compensation Expense } &550,000 \\\text { APIC - Stock Options } &&550,000\\\end{array}$

D)
$\begin{array}{llcc} \text { Compensation Expense } &183,333\\ \text { APIC-Stock Options } &&183,333\\\end{array}$

Question 38

On January 1, Year 1, Gallagher Corporation issued 700,000 stock options for 700,000 shares to a division manager. The options have an estimated fair value of $10 each. These options are not exercisable unless division revenue increases by 8% in four years. Gallagher estimates that it is probable that the goal will be achieved. What is pretax compensation expense for year 1?

A) $0
B) $1,750,000
C) $2,333,333
D) $7,000,000

Question 39

Allied Electronics offered an incentive stock plan to its employees. On January 1, Year 1, 100,000 options were granted for 100,000 $10 par common shares. The exercise price equals the $25 market price of the common stock on the grant date. The vesting period is 3 years. The options cannot be exercised before January 1, Year 4, and expire on December 31, Year 5. Each option has a value of $15 based upon an option pricing model.
At the end of the first year, it is expected that 100% of employees will exercise the options. By the end of Year 2, it is expected that only 80% of the options will be exercised. Allied chooses to adjust the
fair value of options for the estimated forfeitures.
What are the journal entries to reflect the first year and second years' compensation expense? (Do not round intermediate calculations. Only round your final answer to the nearest dollar.)

Question 40

An employee will not redeem a liability-classified award when the stock is out of the money.

Question 41

In non-compensatory employee stock purchase plans, a company will record the amount of the discount below the regular market price as compensation expense.

Question 42

On January 1, Year 1, Axis Corporation granted employees 82,000 stock options for 82,000 shares of $2 par value common stock. The exercise price on the date of issue was equal to the market price of $22. There is a two-year vesting period and the options expire in four years. Employees have the right to sell back the shares to the corporation within six months of exercise. At the time of issue, the fair value of the options is estimated to be $31 per option. Unfortunately, the company experiences a series of setbacks and the stock price falls in Year 4. At December 31, Year 4, the options have a fair value of $18 per option. At the end of four years, none of the options have been exercised. What is the appropriate journal entry to record the expiration of the options?

A) $$\begin{array} { | c | r | r | } \hline \text { Liability for Stock-based Compensation } & 1,476,000 & \\\hline \text { APIC - Expired Stock Options } & & 1,476,000 \\\hline\end{array}$$
B) $$\begin{array} { | c | r | r | } \hline \text { APIC - Expired Stock Options } & 2,542,000 & \\\hline \text { Compensation Expense } & & 2,542,000 \\\hline\end{array}$$
C) $$\begin{array} { | c | r | r | } \hline \text { APIC - Expired Stock Options } & 1,271,000 & \\\hline \text { Compensation Expense } & & 1,271,000 \\\hline\end{array}$$
D) $$\begin{array} { | c | r | r | } \hline \text { Liability for Stock-based Compensation } & 1,271,000 & \\\hline \text { Common Stock } & & 164,000 \\\hline \text { APIC - Common } & & 1,107,000 \\\hline\end{array}$$

Question 43

An employee who is awarded stock appreciation rights must purchase the related shares.

Question 44

To account for stock appreciation rights settled with cash, a company records compensation expense and a related liability.

Question 45

On January 1, Year 1, Axis Corporation granted employees 63,000 stock options for 63,000 shares of $3 par value common stock. The exercise price on the date of issue was equal to the market price of $24. There is a two-year vesting period and the options expire in four years. Employees have the right to sell back the shares to the corporation within six months of exercise. At the time of issue, the fair value of the options is estimated to be $31 per option. Two years later, the options are exercised. What is the appropriate journal entry?

A) $\begin{array}{|l|c|c|}\hline \text { Cash } & 1,512,000 & \\\hline \text { Liability for Stock-based Compensation } & 1,953,000 & \\\hline \text { Common Stock } & & 189,00 \\\hline \text { APIC in Excess of Par - Common } & & \\\hline\end{array}$

B) $$\begin{array} { | l | r | r | } \hline \text { Cash } & 1,512,000 & \\\hline \text { Common Stock } & & 189,000 \\\hline \text { APIC in Excess of Par - Common } & & 1,323,000 \\\hline\end{array}$$
C) $$\begin{array} { | l | r | r | } \hline \text { Cash } & 976,500 & \\\hline \text { Common Stock } & & 189,000 \\\hline \text { APIC in Excess of Par - Common } & & 787,500 \\\hline\end{array}$$
D) $$\begin{array} { | l | r | r | } \hline \text { Cash } & 189,000 & \\\hline \text { Liability for Stock-based Compensation } & 1,953,000 & \\\hline \text { Common Stock } & & 189,000 \\\hline \text { APIC in Excess of Par - Common } & & 1,953,000 \\\hline\end{array}$$

Question 46

The compensation associated with a share of stock under a restricted stock plan is computed as ________.

A) the market price of a share of a similar security
B) the book value of an unrestricted share of the same stock
C) the market price of an unrestricted share of the same stock
D) the book value of a share of similar stock

Question 47

On January 1, 2017, Cable Corporation issues 11,500 stock-appreciation rights to its key executives. The terms of the plan state that the holders of the rights will receive a cash payment equal to the difference between the market price of the stock on the date of exercise and the pre-established price of $9 per share. There is a three-year vesting period and the rights may be exercised on January 1, 2020. The rights expire on January 1, 2022. The closing market prices follow: December 31, 2017 $12 per share
December 31, 2018 $15 per share
December 31, 2019 $14 per share
What is the appropriate journal entry on December 31, 2017? (Do not round any intermediate calculations. Round your final answer to the nearest dollar.)

A) $\begin{array}{|l|r|}\hline \text { Compensation Expense } & 11,500 \\\hline \text { Obligation under SAR Plan } & 11,500\\\hline\end{array}$

B) $$\begin{array} { | c | r | r | } \hline \text { Obligation under SAR Plan } & 103,500 & \\\hline \text { Deferred Compensation } & & 103,500 \\\hline\end{array}$$
C) $$\begin{array} { | c | r | r | } \hline \text { Compensation Expense } & 138,000 & \\\hline \text { Obligation under SAR Plan } & & 138,000 \\\hline\end{array}$$
D) $$\begin{array} { | c | r | r | } \hline \text { Compensation Expense } & 15,333 & \\\hline \text { APIC-SAR } & & 15,333 \\\hline\end{array}$$

Question 48

On January 1, Year 1, Axis Corporation granted employees 50,000 stock options for 50,000 shares of $2 par value common stock. The exercise price on the date of issue was equal to the market price of $24. There is a two-year vesting period and the options expire in four years. Employees have the right to sell back the shares to the corporation within six months of exercise. At the time of issue, the fair value of the options is estimated to be $38 per option. Two years later, on January 1, Year 3, the options are exercised. What are the appropriate journal entries on the date that the options are granted, at the end of Year 1, at the end of Year 2, and on the date that the options are exercised?

Question 49

Restricted stock plans are less dilutive than stock option plans.

Question 50

On January 1, Year 1, Axis Corporation granted employees 48,000 stock options for 48,000 shares of $2 par value common stock. The exercise price on the date of issue was equal to the market price of $23. There is a two-year vesting period and the options expire in four years. Employees have the right to sell back the shares to the corporation within six months of exercise. The fair value of the options has been estimated to be $31 per option and the company does not expect any forfeitures of the options. What is the amount of compensation expense for Year 1?

A) $744,000
B) $0
C) $1,488,000
D) $1,104,000

Question 51

On January 1, Year 1, Axis Corporation granted employees 53,500 stock options for 53,500 shares of $3 par value common stock. The exercise price on the date of issue was equal to the market price of $24. There is a two-year vesting period and the options expire in four years. Employees have the right to sell back the shares to the corporation within six months of exercise. The fair value of the options has been estimated to be $39 per option and the company does not expect any forfeitures of the options. What is the journal entry for compensation expense for Year 1?

A) $$\begin{array} { | l | r | r | } \hline \text { Compensation Expense } & 1,043,250 & \\\hline \text { Liability for Stock-based Compensation } & & 1,043,250 \\\hline\end{array}$$
B) $$\begin{array} { | l | r | r | } \hline \text { Compensation Expense } & 1,284,000 & \\\hline \text { Liability for Stock-based Compensation } & & 1,284,000 \\\hline\end{array}$$
C) $$\begin{array} { | l | r | r | } \hline \text { Compensation Expense } & 1,043,250 & \\\hline \text { Deferred Compensation } & & 1,043,250 \\\hline\end{array}$$
D) $$\begin{array} { | l | r | r | } \hline \text { Compensation Expense } & 1,284,000 & \\\hline \text { Deferred Compensation } & & 1,284,000 \\\hline\end{array}$$

Question 52

On January 1, 2017, Cable Corporation issues 12,500 stock-appreciation rights to its key executives. The terms of the plan state that the holders of the rights will receive a cash payment equal to the difference between the market price of the stock on the date of exercise and the pre-established price of $8 per share. There is a three-year vesting period and the rights may be exercised on January 1, 2020. The rights expire on January 1, 2022. The closing market prices follow: December 31, 2017 $11 per share
December 31, 2018 $14 per share
December 31, 2019 $12 per share
What is the appropriate journal entry when the stock-appreciation rights are exercised on January 1, 2020 when the market price is $12 per share?

A) $$\begin{array} { |l | r | r | } \hline \text { Obligation under SAR Plan } & 50,000 & \\\hline \text { Cash } & & 50,000 \\\hline\end{array}$$
B) $$\begin{array} { | c | r | r | } \hline \text { Obligation under SAR Plan } & 150,000 & \\\hline \text { Deferred Compensation } & & 150,000 \\\hline\end{array}$$
C) $$\begin{array} { | c | r | r | } \hline \text { Compensation Expense } & 150,000 & \\\hline \text { Obligation under SAR Plan } & & 150,000 \\\hline\end{array}$$
D) $\begin{array}{|l|r|r|} \hline \text {Cash } &15,000\\\hline \text { APIC-SAR } &&15,000\\\hline\end{array}$

Question 53

Which of the following statements about liability-classified awards is true?

A) When a company records compensation expense, it will adjust additional paid-in capital at the grant date.
B) In accounting for liability-classified awards, a company records deferred compensation at the grant date.
C) The value of a liability-classified award is typically based on the company's equity.
D) The value of liability classified awards remains unchanged until the award is settled.

Question 54

Which of the following statements is true concerning adjustments to Compensation Expense?

A) Compensation Expense is adjusted when there is a change in vesting probability for both equity-classified and liability-classified awards.
B) Compensation Expense is adjusted when there is a change in fair value for equity-classified and liability-classified awards.
C) Compensation Expense is adjusted for equity-classified awards when there is a change in vesting probability or change in fair value.
D) Compensation Expense is adjusted when there is a change in fair value for a liability-classified award, but not for a change in vesting probability.

Question 55

On January 1, 2017, Cable Corporation issues 6,000 stock-appreciation rights to its key executives. The terms of the plan state that the holders of the rights will receive a cash payment equal to the difference between the market price of the stock on the date of exercise and the pre-established price of $9 per share. There is a three-year vesting period and the rights may be exercised on January 1, 2020. The rights expire on January 1, 2022. The closing market prices follow: December 31, 2017 $12 per share
December 31, 2018 $15 per share
December 31, 2019 $14 per share
What is the appropriate journal entry on December 31, 2018? (Do not round any intermediate calculations. Round your final answer to the nearest dollar.)

A) $\begin{array}{|l|c|c|}\hline\text { Compensation Expense } & 18,000 & \\\hline \text { Obligation under SAR Plan } & & 18,000\\\hline\end{array}$

B) $$\begin{array} { | c | r | r | } \hline \text { Obligation under SAR Plan } & 6,000 & \\\hline \text { Deferred Compensation } & & 6,000 \\\hline\end{array}$$
C) $\begin{array}{|l|r|r|}\hline \text { Compensation Expense } & 72,000 \\\hline \text { Obligation under SAR Plan } && 72,000\\\hline\end{array}$

D) $$\begin{array} { | c | r | r | } \hline \text { Compensation Expense } & 2,000 & \\\hline \text { APIC-SAR } & & 2,000 \\\hline\end{array}$$

Question 56

List the conditions in which employee compensation is classified as a liability under liability classified awards.

Question 57

Which of the following is not a characteristic of a restricted stock plan?

A) The employee cannot sell the awarded shares until the vesting period has expired.
B) A restricted stock plan has value as long as the underlying shares are selling above zero.
C) Restricted shares are not stock options.
D) The employee is taxed on the stock award when it is granted.

Question 58

On January 1, 2017, Cable Corporation issues 15,000 stock-appreciation rights to its key executives. The terms of the plan state that the holders of the rights will receive a cash payment equal to the difference between the market price of the stock on the date of exercise and the pre-established price of $9 per share. There is a three-year vesting period and the rights may be exercised on January 1, 2020. The rights expire on January 1, 2022. The closing market prices follow: December 31, 2017 $12 per share
December 31, 2018 $15 per share
December 31, 2019 $13 per share
What is the appropriate journal entry on December 31, 2019? (Do not round any intermediate calculations. Round your final answer to the nearest dollar.)

A) No journal entry.
B) $\begin{array}{|l|r|r|} \hline \text { Obligation under SAR Plan.} & 15,000 &\\\hline \text { Deferred Compensation } & & 15,000\\\hline \end{array}$

C) $$\begin{array} { | c | r | r | } \hline \text { Compensation Expense } & 195,000 & \\\hline \text { Obligation under SAR Plan } & & 195,000 \\\hline\end{array}$$
D) $\begin{array}{|l|r|r|}\hline\text { Compensation Expense } & 19,500 \\\hline \text { APIC - SAR } && 19,500\\\hline \end{array}$

Question 59

Which of the following statements is false?

A) Stock appreciation rights are a form of compensation similar to a bonus.
B) Employees holding stock appreciation rights are required to purchase shares on the vesting date.
C) The employee benefits from stock appreciation rights only if the stock price increases.
D) The liability for a SAR is measured as the difference between the stock price and the pre-established price.

Question 60

On January 1, Year 1, Axis Corporation granted employees 66,000 stock options for 66,000 shares of $3 par value common stock. The exercise price on the date of issue was equal to the market price of $20. There is a two-year vesting period and the options expire in four years. Employees have the right to sell back the shares to the corporation within six months of exercise. The fair value of the options has been estimated to be $39 per option and the company does not expect any forfeitures of the options. At the end of Year 2, the fair value of each option is $44. What is the journal entry for compensation expense for Year 2?

A) $$\begin{array} { | l | r | l | } \hline \text { Compensation Expense } & 1,617,000 & \\\hline \text { Liability for Stock-based Compensation } & & 1,617,000 \\\hline\end{array}$$
B) $$\begin{array} { | l | r | l | } \hline \text { Compensation Expense } & 1,320,000 & \\\hline \text { Liability for Stock-based Compensation } & & 1,320,000 \\\hline\end{array}$$
C) $$\begin{array} { | l | r | l | } \hline \text { Compensation Expense } & 1,617,000 & \\\hline \text { Deferred Compensation } & & 1,617,000 \\\hline\end{array}$$
D) $$\begin{array} { | l | r | r | } \hline \text { Compensation Expense } & 1,320,000 & \\\hline \text { Deferred Compensation } & & 1,320,000 \\\hline\end{array}$$

Question 61

The accumulated benefit obligation reflects only current salary levels.

Question 62

On January 1, 2017, Bubert Corporation issues 10,000 shares of $5 par restricted stock to its key executives. The market value of unrestricted shares of the same stock on the date of issue is $25 and there is a four-year vesting period. Record the journal entries for the issuance of the restricted shares, as well as compensation expense for the first year.

Question 63

Which of the following conditions is not required for an employee stock purchase plan to be non-compensatory?

A) The plan is made available to substantially all employees.
B) After the plan is established, there is a maximum one-month period to elect to participate in the plan.
C) The discount is not larger than 5% of the open market price.
D) Top-level employees may purchase no more than a set percentage of shares available.

Question 64

Companies are required to disclose the intrinsic values of outstanding stock options granted.

Question 65

Which of the following statements regarding disclosures for stock-based compensation plans is false?

A) An entity is required to disclose the intrinsic values of outstanding stock options granted.
B) The effect on the stock-based compensation plans on the entity's cash flows must be disclosed.
C) An entity must disclose information only for vested shares that are exercised and exercisable.
D) An entity must provide a reconciliation of beginning and ending amounts for the number and weighted average exercise price of share options.

Question 66

Teague Corporation permits any of its employees to buy shares directly from the company through payroll deduction. There are no brokerage fees and shares can be purchased at a 10% discount. During July, employees purchased 20,000 $2 par shares of common stock at a time when the established market price was $30 per share. What is the journal entry to record issuance of these shares?

Question 67

Teague Corporation permits any of its employees to buy shares directly from the company through payroll deduction. There are no brokerage fees and shares can be purchased at a 10% discount. During July, employees purchased 33,000 shares at a time when the established market price was $26 per share. Teague will record compensation expense associated with July purchases of ________.

A) $0
B) $85,800
C) $772,200
D) $858,000

Question 68

List the four key areas that minimum disclosures for stock-based compensation plans must address.

Question 69

Teague Corporation permits key employees to buy shares directly from the company through payroll deduction. There are no brokerage fees and shares can be purchased at a 10% discount. During July, employees purchased 20,000 $2 par shares of common stock at a time when the established market price was $30 per share. What is the journal entry to record issuance of these shares?

Question 70

On January 1, 2017, Bubert Corporation issues 12,500 shares of $2 par restricted stock to its key executives. The market value of unrestricted shares of the same stock on the date of issue is $19 and there is a four-year vesting period. What is the amount of compensation expense recorded on December 31, 2017?

A) $59,375
B) $53,125
C) $237,500
D) $25,000

Question 71

Block Corporation permits key employees to buy shares directly from the company through payroll deduction. There are no brokerage fees and shares can be purchased at a 10% discount. During July, employees purchased 36,000 shares at a time when the established market price was $31 per share. Block will record salary expense associated with July purchases of ________.

A) $0
B) $111,600
C) $1,004,400
D) $1,116,000

Question 72

Accountants must make a judgment about the probability of forfeiture in a stock-based compensation plan.

Question 73

On January 1, 2017, Smart Corporation issues 10,000 shares of $5 par restricted stock to an executive. The market value of unrestricted shares of the same stock on the date of issue is $25 and there is a four-year vesting period. On January 1, 2018, the executive leaves and forfeits the restricted stock award. Record the journal entries for the issuance of the restricted shares, compensation expense for the first year, and forfeiture of the restricted stock.

Question 74

On January 1, 2017, Smart Corporation issues 12,500 shares of $2 par restricted stock to a key executive. The market value of unrestricted shares of the same stock on the date of issue is $18 and there is a four-year vesting period. On January 1, 2018, the executive leaves and forfeits the restricted stock award. The journal entry to record the forfeiture includes which of the following?

A) credit Deferred Compensation $56,250
B) credit Common Stock $25,000
C) debit Deferred Compensation for $25,000
D) credit Compensation Expense for $56,250

Question 75

In what ways must an accountant exercise judgment in relation to stock-based compensation plans?

Question 76

In a contributory pension plan, employees must fund some or all of their pension costs.

Question 77

In a noncontributory pension plan, employees must fund some or all pension benefits.

Question 78

The vested benefit obligation uses future salary levels.

Question 79

Teague Corporation permits any of its employees to buy shares directly from the company through payroll deduction. There are no brokerage fees and shares can be purchased at a 10% discount. During July, employees purchased 40,000 shares at a time when the established market price was $26 per share. Teague will record an increase in cash of ________ associated with July purchases.

A) $0
B) $104,000
C) $936,000
D) $1,040,000

Question 80

On January 1, 2017, Bubert Corporation issues 8,500 shares of $2 par restricted stock to its key executives. The market value of unrestricted shares of the same stock on the date of issue is $25 and there is a four-year vesting period. What is the amount of deferred compensation recorded on January 1, 2017?

A) $212,500
B) $195,500
C) $17,000
D) $178,500