Deck 23: Share-Based Payments

Question 1

Little Purple Puppies sells a unique variety of dog that has purple fur. They employ a genetic engineer to help them breed these puppies. They've promised to give him a bonus at the end of the year for his outstanding work in breeding purple puppies. He's agreed to receive a bonus based on the share price of Little Purple Puppies at the end of this year. What type of share-based payment is this?

A) Equity-settled share-based payment
B) Cash-settled share-based payment
C) Choice of settlement
D) None of the above

Answer 1

Cash-settled share-based payment

Question 2

Adam Michigan has been a tremendous asset to Wacker Entity, which provides legal services. This year, Adam has been awarded stock options for his contributions. His stock options were granted on August 5 and were worth $500,000 on that date. At the end of the reporting period, they were worth $550,000. Wacker Entity estimates that the options will be worth $1 million on the vesting date in two years. At the end of the reporting period, which amount will be recorded on Wacker's books?

A) DR $500,000 expense
B) DR $550,000 expense
C) CR $550,000 share options
D) DR $1,000,000 expense
E) None of the above

Answer 2

DR $500,000 expense

Question 3

Crazy Corbin offered his executives stock options. According to Crazy Corbin, in order for these to vest, Crazy Corbin Co. must achieve a net income of $10,000,000. What type of vesting condition is this?

A) Service (Non-market)
B) Performance (Non-market)
C) Performance (Market)
D) Non-vesting
E) None of the above

Answer 3

Performance (Non-market)

Question 4

The Rustic Knot Entity, a purveyor of green technologies, offers its executives a stock option package that vests after 500 hours of community service. Not all stock option packages are expected to vest. How should this be accounted for?

A) As a service condition, excluding those options not expected to vest
B) As a performance condition, excluding those options not expected to vest
C) As a service condition, including those options not expected to vest
D) As a performance condition, including those options not expected to vest
E) None of the above

Question 5

Which of the following is not an input listed by IFRS 2 that must be taken into account in measuring the fair value of a stock option?

A) Market prices
B) Exercise price
C) Risk-free rate
D) Expected dividends
E) All of the above must be taken into account

Question 6

Schwarzwald Schokolade is a German chocolate booth at the annual Christkindlmarket in the town square of Heilbronn. The entity is looking to expand to Chicago's Christkindlmarket. Schwarzwald Schokolade also has several executives that have been granted graded-vesting stock options that vest over the next five years. Which of the following is a difference between U.S. GAAP and IFRS with regard to graded vesting?

A) Total compensation expense
B) Yearly compensation expense
C) Use of an option pricing model
D) None of the above

Question 7

When is a share-based payment transaction recognized as an asset?

A) When the goods or services meet the definition of an asset.
B) When the goods or services are cash based.
C) When the goods or services are equity based.
D) When the goods or services have economic value for more than one year.

Question 8

How is an entity required to measure goods or services received?

A) At the imputed rate of interest.
B) At fair value at the measurement date.
C) At cost.
D) At the negotiated price.

Question 9

How are equity-settled share-based transactions measured?

A) At the price of the last equity transaction in an established market.
B) At the fair value at the measurement date of the goods or services received.
C) At the average weighted cost of equity.
D) At the negotiated price.

Question 10

What is the grant date?

A) It is the date at which the entity's board of directors approves the share-based payment plan.
B) It is the date at which the entity's employees are notified of the share-based payment plan.
C) It is the date at which the shareholders receiving legal notification the share-based payment plan has been established.
D) It is the date at which the reporting entity and the counterparty agree to and reach a shared understanding of the terms and conditions of the arrangement.

Question 11

Trevor received 500 stock appreciation rights. Trevor owns the stock.

Question 12

Sterling & Price Entity offered its top executives a stock option package that vests when share prices hit $145 in the next two years. They record the applicable expenses, but the shares never vest during the two years. Even though no share options vest, the expenses cannot be reversed.

Question 13

Equity-settled share-based payment transactions are measured at fair value of the goods or services.

Question 14

The fair value of employee share options is based on market prices.

Question 15

Market vesting conditions, such as achieving a specified share price, are included in the grant date fair value measurement.

Question 16

Cash-settled share-based payment transactions are measured at the fair value of the liability at the date the option awards are established.

Question 17

If the counterparty has the right to choose settlement in either shares or cash, a compound financial instrument is split into a liability and an equity component.

Question 18

The vesting period is the period during which an employee must work full-time.

Question 19

Share-based payment awards may have one grant date and different vesting periods.

Question 20

Share appreciation rights (SAR) are common examples of cash-settled share-based payment transactions.

Question 21

Big Tech Entity (BTE) grants five senior employees 20,000 share options (4,000 options each) on January 4, 20X7, to acquire shares of the entity for a fixed amount, that vest on the grant date. The board of shareholders approved these awards on February 1. BTE determined that each option has a fair value equal to $10 on January 4 and $15 on February 1. What is the journal entry recognize share options on the grant date?

Question 22

Big Tech Entity (BTE) grants five senior employees 20,000 share options (4,000 options each) on January 4, 20X7, to acquire shares of the entity for a fixed amount, that vest on the grant date on the condition that the market price of the shares increases by at least 10% between 1/4/20X7 and 12/31/20X8. Provide the journal entries on December 31, 20X7 and December 31, 20X8.

Question 23

Turner Technologies (TT) received a shipment of transistors. In exchange, TT gave the supplier 50,000 common shares with a fair value price $25 per share on the date of the exchange. What is the journal entry for this transaction.

Question 24

Chattanooga Dobro manufactures mandolins, dobros, dulcimers, zithers, and other country music instruments. On March 1, 20X1, Chattanooga offered its CEO 30,000 stock options that vest at the end of each year for the next 3 years. The fair value of the stock options on the grant date was $50 per option. The Black-Scholes-Merton pricing model was used to determine the fair value of the stock options. How much compensation expense is attributed to each of the years?

Question 25

Stein & Sons Entity granted 50,000 shares to 5 of its key employees (10,000 shares each) on June 1, 20X7. This action was approved by the board of directors on July 31, 20X6. The fair value of the shares were $50 and $52 respectively. The shares vest over three years and the company expects that one employee will likely leave before the shares vest. What is the journal entry to record this share-based compensation on December 31, 20X6? July 31,

Question 26

On January 1, 20X7, Signal Entity (SE) granted 500 cash-settled share appreciation right to each of its eight member executive team. For an executive member to receive the share appreciation right, the executive must remain in service for the next three years. Cash is payable at the end of three years based on the share price of SE's shares on such date. Fair value of SAR is as follows: 12/31/20X7 = $15; 12/31/20X8 = $17 and 12/31/20X9 = $20. SE will pay cash on 12/31/20X9 to redeem the vested SARs based on the share price of SE's shares on this day. In 20X7, SE estimated that one member is expected to leave in 20X8. In 20X8 one member leaves and SE estimates that additional one will leave in 20X9. In 20X9 two members leave.

-Calculate the liability for each year.

Question 27

On January 1, 20X7, Signal Entity (SE) granted 500 cash-settled share appreciation right to each of its eight member executive team. For an executive member to receive the share appreciation right, the executive must remain in service for the next three years. Cash is payable at the end of three years based on the share price of SE's shares on such date. Fair value of SAR is as follows: 12/31/20X7 = $15; 12/31/20X8 = $17 and 12/31/20X9 = $20. SE will pay cash on 12/31/20X9 to redeem the vested SARs based on the share price of SE's shares on this day. In 20X7, SE estimated that one member is expected to leave in 20X8. In 20X8 one member leaves and SE estimates that additional one will leave in 20X9. In 20X9 two members leave.

-Give the journal entries for each year.