FAR SEC 13

Question 1

What are the major components of corporate equity? (3 elements)

Answer 1

Corporate equity is more complex than partner or proprietor equity.
Its major components are
1)contributed capital,
2) retained earnings,
3) and accumulated other comprehensive income.

Question 2

Where is equity reported?

Answer 2

Equity is reported on the face of the balance sheet.

Question 3

What is stock authorized?

Answer 3

Stock authorized is the maximum amount of stock that a corporation is legally allowed to issue.
-The charter (articles of incorporation) filed with the secretary of state of the state of incorporation indicates the classes of stock that may be issued and their authorized amounts in terms of shares or total dollar value.

Question 4

What is stock issued?

Answer 4

Stock issued is the amount of stock authorized that was actually issued by the corporation.

Question 5

What is stock outstanding?

Answer 5

Stock outstanding is the amount of stock issued that was purchased and is held by shareholders.
-Stock outstanding may be lower than stock issued as a result of the entity’s repurchases of its own stock (treasury stock).

Question 6

What are the five attributes of common stock?

Answer 6

1) The most widely used classes of stock are common and preferred. Common shareholders are entitled to receive liquidating distributions only after all other claims have been satisfied, including those of preferred shareholders.
2) Common shareholders are not entitled to dividends.
-A corporation may choose not to declare dividends. Among the reasons are insufficient retained earnings to meet a legal requirement or the need to use cash for some other purpose.
3) State statutes typically permit different classes of common stock with different rights or privileges, e.g., class A common with voting rights and class B common with no voting rights.
4) If only one class of stock is issued, it is treated as common, and each shareholder must be treated equally.
5) Common shareholders elect directors to the board.

Question 7

Are common shareholders entitled to dividends?

Answer 7

No.

Question 8

May a corporation choose not to declare dividends?

Answer 8

Yes.

Question 9

What are the five attributes of preferred stock?

Answer 9

1) Preferred shareholders have the right to receive (1) dividends at a specified rate (before common shareholders may receive any) and (2) distributions before common shareholders (but after creditors) upon liquidation. But they tend not to have voting rights or to enjoy the same capital gains as the common shareholders.
2) If a board issues preferred stock, it may establish different classes or series. Each may be assigned independent rights, dividend rates, and redemption prices.
3) Holders of convertible preferred stock have the right to convert the stock into shares of another class (usually common stock) at a predetermined ratio set forth in the articles or bylaws.
4) Callable preferred stock is issued with the condition that it may be called (redeemed or repurchased) by the issuer at a stated price and time. Issuers may establish a sinking fund for this purpose.
5) Mandatorily redeemable financial instruments (MRFIs) are redeemable shares that embody an unconditional obligation to transfer assets at a fixed or determinable time or upon an event certain to occur.
-MRFIs must be accounted for as liabilities unless the redemption is required only upon the liquidation or termination of the entity.

Question 10

What two special rights to preferred shareholders have?

Answer 10

Preferred shareholders have the right to receive
(1) dividends at a specified rate (before common shareholders may receive any) and
(2) distributions before common shareholders (but after creditors) upon liquidation.

Question 11

What rights to preferred shareholders usually lack?

Answer 11

But they tend not to have voting rights or to enjoy the same capital gains as the common shareholders.

Question 12

What right do holders of convertible preferred stock have?

Answer 12

Holders of convertible preferred stock have the right to convert the stock into shares of another class (usually common stock) at a predetermined ratio set forth in the articles or bylaws.

Question 13

What is callable preferred stock?

Answer 13

Callable preferred stock is issued with the condition that it may be called (redeemed or repurchased) by the issuer at a stated price and time. Issuers may establish a sinking fund for this purpose.

Question 14

What are mandatorily redeemable financial instruments (MFRIs)?

Answer 14

Mandatorily redeemable financial instruments (MRFIs) are redeemable shares that embody an unconditional obligation to transfer assets at a fixed or determinable time or upon an event certain to occur.
-MRFIs must be accounted for as liabilities unless the redemption is required only upon the liquidation or termination of the entity.

Question 15

What are the attributes of the contributed capital equity account? (3 elements)

Answer 15

1) Contributed capital (paid-in capital) represents amounts invested by owners in exchange for stock (common or preferred).
2) Capital stock (stated capital) is the par value (or stated value) of all shares issued and outstanding.
Amounts for common and preferred stock are separately listed. Absent treasury stock, the number of shares may be determined by dividing these amounts by the related par value per share.
3) Additional paid-in capital (paid-in capital in excess of par value) consists of amounts in excess of stated capital.

Question 16

What is contributed capital?

Answer 16

Contributed capital (paid-in capital) represents amounts invested by owners in exchange for stock (common or preferred).

Question 17

What is capital stock?

Answer 17

Capital stock (stated capital) is the par value (or stated value) of all shares issued and outstanding.
-Amounts for common and preferred stock are separately listed. Absent treasury stock, the number of shares may be determined by dividing these amounts by the related par value per share.

Question 18

What is additional paid-in capital?

Answer 18

Additional paid-in capital (paid-in capital in excess of par value) consists of amounts in excess of stated capital.

Question 19

What are the three attributes of the retained earnings capital account?

Answer 19

1) Retained earnings is increased by net income and decreased by (1) net losses, (2) cash or property dividends, (3) stock dividends, (4) split-ups effected in the form of a dividend, and (5) certain treasury stock transactions.
2) Prior-period adjustments (error corrections) also are made to retained earnings.
3) A change in accounting principle is applied retrospectively. The cumulative effect on all prior periods is reflected in the opening balances of assets, liabilities, and retained earnings (or other appropriate components of equity) for the first period presented.

Question 20

What single factor increases retained earnings?

Answer 20

Retained earnings is increased by net income

Question 21

What five factors decrease retained earnings?

Answer 21

Retained earnings is increased by net income and decreased by (1) net losses, (2) cash or property dividends, (3) stock dividends, (4) split-ups effected in the form of a dividend, and (5) certain treasury stock transactions.

Question 22

What are the four attributes of appropriated retained earnings?

Answer 22

1) Retained earnings amounts may be appropriated (restricted) at management’s discretion to disclose that earnings are to be used for purposes other than dividends. An appropriation must be clearly displayed within equity.
2) Purposes include (a) compliance with a bond indenture (bond contract), (b) retention of assets for internally financed expansion, (c) anticipation of losses, or (d) adherence to legal restrictions. For example, a state law may restrict retained earnings by an amount equal to the cost of treasury stock.
3) The appropriation does not set aside assets. It limits the availability of dividends. A formal entry (debit retained earnings, credit retained earnings appropriated) or disclosure in a note may be made.
4) Transfers to and from an appropriation do not affect net income.
-Costs and losses are not debited to an appropriation, and no amount is transferred to income.

Question 23

What are the four attributes of the treasury stock equity account?

Answer 23

1) Treasury stock is the entity’s own stock that was repurchased by the entity subsequent to its initial issuance to shareholders.
2) Treasury stock reduces the shares outstanding, not the shares authorized.
3) It is commonly accounted for at cost (discussed later in this study unit).
4) Treasury stock is not an asset, and dividends are never paid to these shares.

Question 24

What is the accumulated other comprehensive income equity account?

Answer 24

Accumulated other comprehensive income is a separate component of equity that includes items excluded from net income. Items in that component should be classified according to their nature. A list of items reported as other comprehensive income is in Study Unit 2, Subunit 3.

Question 25

What is the financial statement presentation of preferred stock?

Answer 25

In the equity section, preferred stock is generally reported before common stock because it is a hybrid of debt and equity. This position reminds readers that, in liquidation, the claims of the preferred shareholders must be satisfied before the common shareholders can be paid.

Question 26

What is par value (of stock)? (3 elements)

Answer 26

1) The par value of stock is an arbitrary amount assigned by the issuer. Most states treat par value as legal capital, an amount unavailable for dividends.
2) Common and preferred stock are reported in the financial statements at par value.
3) When no-par stock is issued, most states require it to have a stated value equivalent to par value.

Question 27

What is issuance of stock?

Answer 27

Cash is debited, the appropriate stock account is credited for the total par value, and additional paid-in capital (paid-in capital in excess of par) is credited for the difference.

Question 28

What are the costs of (stock) issuance? (2 elements)

Answer 28

1) Direct costs of issuing stock (underwriting, legal, accounting, tax, registration, etc.) reduce the net proceeds received and additional paid-in capital. Equity interests and the issue costs inherent to them are permanent. Thus, they are not expensed.
2) In contrast, debt issue costs reduce the carrying amount of the debt and are amortized. They benefit the entity only for the life of the debt, and the cost therefore must be systematically and rationally allocated over that life.

Question 29

What are the three attributes of share-based payment for goods or services?

Answer 29

1) Occasionally, stock is issued for goods received or services rendered.
2) The transaction should be recorded at the grant-date fair value of the stock issued.
3) The grant date is the date at which a mutual understanding of the key terms and conditions of the share-based payment award was reached.

Question 30

What are the attributes of donated capital?

Answer 30

1) In general, contributions received must be recognized as revenues or gains in the period of receipt. They should be measured at fair value.
2) The receipt of a contribution of an entity’s own stock is recorded at fair value as increases in both contributed capital and treasury stock.
3) Because these accounts offset, the transaction has no net effect on equity. Also, transactions in an entity’s own stock cannot result in a gain or loss.

Question 31

What is the accounting treatment for conversion of convertible preferred stock? ( 2 elements)

Answer 31

1) When conversion occurs, all related amounts are removed from the books and replaced with amounts related to the new security.
2) Transactions in an entity’s own stock may not result in a gain or loss. Thus, the conversion is reported using the book value method. The new shares are recorded at the carrying amount of the converted shares.

Question 32

What is the accounting treatment of combined (stock) issuance? (2 elements)

Answer 32

1) The proceeds of the combined issuance of different classes of securities are allocated based on the relative fair values of the securities.
2) If the fair value of one class of securities is not known, the incremental method is used. The other securities are recorded at their fair values. The remaining proceeds are credited to the securities for which fair value is not determinable.

Question 33

What is a stock warrant?

Answer 33

A warrant is a certificate representing a right to purchase shares at a specified price within a specified period. Thus, it is an equity security. Warrants are usually attached to other securities.

Question 34

What is the preemptive right?

Answer 34

The preemptive right safeguards a shareholder’s proportionate ownership. It is the right to purchase a pro rata amount of a new issuance of the same class of stock.

Question 35

What is the (stock) issuer’s accounting? (3 elements)

Answer 35

1) In a rights offering, each shareholder is issued a warrant that is an option to buy a certain number of shares at a fixed price.
i) When rights are issued for no consideration, the issuer makes only a memorandum entry.
-If rights previously issued without consideration are allowed to lapse, contributed capital is unaffected.
ii) Rights issued for consideration constitute share-based payment, discussed in detail in Subunit 13.10.
2) If the rights are exercised and stock is issued, the issuer will reflect the proceeds received as a credit to (an increase in) common (preferred) stock at par value, with any remainder credited to additional paid-in capital.
3) Transaction costs associated with the redemption of stock rights reduce equity.

Question 36

What is the (stock issuance) recipient’s accounting? (4 elements)

Answer 36

1) The recipient of stock rights must allocate the carrying amount of the shares owned between the shares and rights based on their relative fair values at the time the rights are received.
The recipient then has three options:
2) If the rights are exercised, the amount allocated to them becomes part of the carrying amount of the acquired shares.
3) If the rights are sold, their carrying amount is credited, cash is debited, and a gain (loss) is credited (debited).
4) If the rights expire, a loss is recorded.

Question 37

For treasury stock, what is cost method v. par-value method? (2 elements)

Answer 37

1) Under the cost method, treasury shares are reported at their reacquisition price, and the journal entry is a debit to treasury stock and a credit to cash.
i) On the balance sheet, treasury stock is reported separately as a reduction of total shareholders’ equity.
ii) The cost method is much more common in practice.
2) Under the par-value method, the acquisition is treated as a constructive retirement. All related amounts are removed from the books.

Question 38

For treasury stock, what is the accounting treatment if acquisition price > original issue price?

Answer 38

Under the par-value method, if the acquisition price is greater than the original issue price, the difference is a reduction of retained earnings or a credit balance in additional paid-in capital (APiC) from treasury stock transactions.

Question 39

For treasury stock, what is the accounting treatment if acquisition cost < original issue price? (2 elements)

Answer 39

1) Under the par-value method, if the acquisition price is less than the original issue price, additional paid-in capital is decreased (debited) for the difference between the acquisition price and the par value of the stock reacquired.
2) However, if the acquisition price is less than the par value of stock reacquired, the difference is an increase in PiC from treasury stock transactions. (Gains and losses are not recognized on transactions in an entity’s own stock.)

Question 40

What is the accounting presentation of treasury stock?

Answer 40

Treasury stock is not an asset. It is reported as a contra-equity account and decreases the total number of shares outstanding.

Question 41

For the accounting treatment of the reissue of treasury stock, what is the accounting for the condition of reissue price > cost?

Answer 41

The excess is credited to paid-in capital from treasury stock transactions.

Question 42

For the accounting treatment of the reissue of treasury stock, what is the accounting for the condition of reissue price < cost?

Answer 42

1) Under the cost method, the difference is debited to paid-in capital from treasury stock transactions to the extent of any credit balance. Otherwise, the debit is to retained earnings.
2) Under the par-value method, the difference is credited to paid-in capital from treasury stock transactions.

Question 43

What is included in the journal entire to retire stock? (5 elements)

Answer 43

1) Occasionally, a company decides to retire its own stock. The company may retire treasury stock it already owns or non-treasury stock it purchases. The journal entry to record this retirement includes the following:
2) When treasury stock is retired, the treasury stock account is credited. When non-treasury stock is retired, cash or other consideration given is credited.
3) The stock account is debited for the par or stated value.
4) Additional paid-in capital is debited to the extent it exists from the original issuance.
5) Any remainder is debited to retained earnings or credited to paid-in capital from stock retirement.

Question 44

Is a gain or loss reported on transactions involving a entity’s own stock?

Answer 44

No. No gain or loss is reported on transactions involving an entity’s own stock.

Question 45

Does a retirement of treasury stock change the number of shares authorized?

Answer 45

No. A retirement of treasury stock does not change the number of shares authorized.

Question 46

How are dividends distributed?

Answer 46

Dividends may be distributed in the form of cash or property. (Stock dividends, discussed later in this study unit, are not a form of return on investment.)
-Dividends are paid on outstanding shares only, not on treasury stock.

Question 47

Are dividends paid on treasury stock?

Answer 47

No. Dividends are paid on outstanding shares only, not on treasury stock.

Question 48

What are the relevant dates for cash dividends? (3 elements)

Answer 48

1) On the date of declaration, the board of directors formally approves a dividend.
i) Unlike a stock dividend, a cash or property dividend cannot be withdrawn once declared. Thus, a cash or property dividend becomes a legal liability of the corporation on the date of declaration.
ii) The dividend is recorded by reclassifying a portion of retained earnings as a payable.
-In most states, a corporation may not declare a dividend in excess of its balance of retained earnings.
2) All holders of the stock on the date of record are legally entitled to receive the dividend.
3) The date of payment is the date on which the dividend is paid.

Question 49

What is the accounting treatment for dividends on preferred stock? (3 elements)

Answer 49

1) Most preferred shares are issued with a stated dividend rate.
-The dividends on preferred stock equal the par value of the stock times its stated dividend rate.
2) Unlike interest on debt, dividends on preferred stock are not a legal obligation of the corporation until the board chooses to declare them. Common shareholders may not receive a dividend unless the current-year preferred dividend has been paid.
3) When a corporation has outstanding cumulative preferred stock, common shareholders may not receive a dividend until all preferred dividends in arrears have been paid.
i) Dividends in arrears are preferred dividends that were not declared in prior years.
ii) Although they are not legal liabilities of the corporation, dividends in arrears must be disclosed either on the face of the balance sheet or in the notes, both in the aggregate and per share.

Question 50

Which shareholders are entitled to receive a dividend?

Answer 50

All holders of the stock on the date of record are legally entitled to receive the dividend.

Question 51

For cumulative preferred stock, what are the attributes for dividends? (3 elements)

Answer 51

1) When a corporation has outstanding cumulative preferred stock, common shareholders may not receive a dividend until all preferred dividends in arrears have been paid.
2) Dividends in arrears are preferred dividends that were not declared in prior years.
3) Although they are not legal liabilities of the corporation, dividends in arrears must be disclosed either on the face of the balance sheet or in the notes, both in the aggregate and per share.

Question 52

In what two ways does the distribution of a property dividend affect retained earnings?

Answer 52

The distribution of a property dividend affects retained earnings in two ways:
1) Remeasurement of the property to fair value affects net income for the period.
2) The decrease for the fair value of the property distributed.
-Thus, the total decrease in retained earnings as a result of a property dividend declaration equals the carrying amount of the property distributed.

Question 53

What are the two attributes of property dividends?

Answer 53

1) When a corporation declares a dividend consisting of tangible property, the property is first remeasured to fair value as of the date of declaration. The remeasurement to fair value is recognized in the income statement.
2) The distribution of a property dividend affects retained earnings in two ways:
i) Remeasurement of the property to fair value affects net income for the period.
ii) The decrease for the fair value of the property distributed.
-Thus, the total decrease in retained earnings as a result of a property dividend declaration equals the carrying amount of the property distributed.

Question 54

What are the three attributes of liquidating dividends?

Answer 54

Dividends in excess of a corporation’s retained earnings are liquidating dividends. They are not considered dividends but are treated as a return of capital.
The effect of a liquidating dividend is to decrease contributed capital.
Additional paid-in capital is debited first to the extent available before other contributed capital accounts are charged.

Question 55

What is the basic definition of stock dividends and stock splits?

Answer 55

Stock dividends and stock splits are distributions of stock to current shareholders in return for no consideration.

Question 56

What is definition of a stock dividend? (4 elements)

Answer 56

1) In a stock dividend, a portion of retained earnings is capitalized as part of paid-in capital.
2) The par value of the shares is unchanged.
3) An issuance of shares less than 20% to 25% of the previously outstanding common shares should be recognized as a stock dividend.
-The SEC requires an issuance of less than 25% by a public entity to be treated as a stock dividend.
4) An issuance of more than 20% to 25% of the previously outstanding common shares (25% or more for public entities) more closely resembles a stock split than a dividend.
-An entity may be legally required to capitalize the par value of the additional shares issued. In this case, the term stock split in the form of a dividend should be used.

Question 57

What is a stock split? (2 elements)

Answer 57

1) In a stock split, no journal entry is made other than a memorandum entry.
2) The par value of the shares is reduced.

Question 58

What is the accounting for stock dividends?

Answer 58

In accounting for a stock dividend, the fair value of the additional shares issued is reclassified from retained earnings to capital stock (at par value) and the difference to additional paid-in capital.

Question 59

What is the accounting treatment of the stock split in the form of a dividend?

Answer 59

The state of incorporation may require capitalization of retained earnings for a stock split in the form of a dividend, usually in an amount based on par value.

Question 60

What is the accounting treatment for stock splits? (2 elements)

Answer 60

1) The primary purpose of a stock split is to improve the stock’s marketability by reducing its market price and proportionally increasing the number of shares outstanding.
2) A stock split does not require an adjustment to retained earnings or paid-in capital and does not affect total equity.
3) A reverse stock split reduces the number of shares outstanding, which serves to increase the fair value per share of those shares still outstanding.

Question 61

What is a reverse stock split?

Answer 61

A reverse stock split reduces the number of shares outstanding, which serves to increase the fair value per share of those shares still outstanding.

Question 62

What are other issues pertaining to stock dividends and stock splits? (2 elements)

Answer 62

1) The recipient of a stock dividend or stock split should not recognize income. After receipt, the shareholder has the same proportionate interest in the corporation and the same total carrying amount as before the declaration.
2) Treasury stock may be adjusted for stock dividends and splits to protect it from dilution. However, some states prohibit the payment of stock dividends on treasury stock.

Question 63

What is the accounting treatment for share-based payment? (3 elements)

Answer 63

1) This guidance applies to share-based payment transactions (with employees and nonemployees) involving receipt by the entity of goods or services in return for the following:
i) Its equity instruments, e.g., shares or share options
ii) Incurrence of liabilities to suppliers that
a) Are based on the price of the entity’s equity instruments or
b) May require share settlement
2) Share-based payment awards are measured initially at the grant-date fair value of the equity instruments that an entity is obligated to issue.
-The grant date is the date at which a mutual understanding of the key terms and conditions of the award have been reached.
3) Goods and services received from nonemployees for share-based payment awards are recognized in the same manner as if cash were paid for them.

Question 64

What is the accounting treatment for stock compensation - equity classified awards? (2 elements)

Answer 64

1) The estimated total compensation expense for equity awards is measured at the grant-date fair value of the equity instruments issued.
i) This compensation expense is allocated over the requisite service period.
a) The requisite service period is the period during which employees must perform services. It is most often the vesting period.
b) The beginning of the requisite service period is usually the grant date.
c) The credit is to a paid-in capital account. The following are typical journal entries:
2) Total compensation expense at the end of the requisite service period is based on the number of equity instruments for which the requisite service was completed.
i) If during the entire requisite service period (vesting period) all the granted equity instruments expect to vest, the total compensation expense is equally allocated over the vesting period. Thus, an equal amount of compensation expense is recognized each period.
ii) If the number of equity instruments expected to vest is changed during the requisite service period, the effect of a change is recognized through a cumulative catch-up adjustment that is included in compensation expense in the period of the change in estimate.
iii) The number of equity instruments expected to vest may change due to the following vesting conditions:
a) Service conditions pertain solely to rendering services for the designated period.
b) Performance conditions relate to rendering services for a specified period and reaching objectives that relate solely to the employer’s activities (e.g., achieving a stated growth rate).
c) Market conditions (e.g., attaining a specified share price) do not affect vesting.

Question 65

What is shown on the graphic for compensation expense?

Answer 65

Question 66

How is compensation expense allocated? (4 elements)

Answer 66

The estimated total compensation expense for equity awards is measured at the grant-date fair value of the equity instruments issued.
1) This compensation expense is allocated over the requisite service period.
2) The requisite service period is the period during which employees must perform services. It is most often the vesting period.
3) The beginning of the requisite service period is usually the grant date.
4) The credit is to a paid-in capital account. The following are typical journal entries: SEE GRAPHIC

Question 67

What are the four attributes of total compensation expense?

Answer 67

1) Total compensation expense at the end of the requisite service period is based on the number of equity instruments for which the requisite service was completed.
If during the entire requisite service period (vesting period) all the granted equity instruments expect to vest, the total compensation expense is equally allocated over the vesting period. Thus, an equal amount of compensation expense is recognized each period.
2) If the number of equity instruments expected to vest is changed during the requisite service period, the effect of a change is recognized through a cumulative catch-up adjustment that is included in compensation expense in the period of the change in estimate.
3) The number of equity instruments expected to vest may change due to the following vesting conditions:
i) Service conditions pertain solely to rendering services for the designated period.
ii) Performance conditions relate to rendering services for a specified period and reaching objectives that relate solely to the employer’s activities (e.g., achieving a stated growth rate).
iii) Market conditions (e.g., attaining a specified share price) do not affect vesting.

Question 68

For stock compensation (equity-classified awards), how do vesting conditions affect the number of equity instruments expected to vest? (4 elements)

Answer 68

1) The number of equity instruments expected to vest may change due to the following vesting conditions:
2) Service conditions pertain solely to rendering services for the designated period.
3) Performance conditions relate to rendering services for a specified period and reaching objectives that relate solely to the employer’s activities (e.g., achieving a stated growth rate).
4) Market conditions (e.g., attaining a specified share price) do not affect vesting.

Question 69

What are the attributes of stock compensation - liability-classified awards? (3 elements)

Answer 69

1) An award may meet the criteria for classification as a liability. (Equity vs. liability classification is discussed in Study Unit 11, Subunit 6.)
2) The measurement date for liabilities is the settlement date. Thus, after initial recognition at fair value, liabilities are remeasured to fair value at each reporting date through the date of settlement.
i) Periodic compensation expense is based on the change (or part of the change, depending on the percentage of requisite service performed to date) in fair value of the liability.
ii) Under specific circumstances, certain liability awards may be measured based on intrinsic value.

Intrinsic value = Fair value of an underlying stock – Exercise price of an option

3) Share appreciation rights (SARs) are examples of liability-classified awards. SARs allow employees to receive (e.g., in cash) the increase in the fair value of the shares directly from the employer.
-The employee receives compensation equal to the excess of the share’s market price on the exercise date over the option price (generally the share’s market price on the grant date).

Question 70

For stock compensation - liability-classified awards, how are the liabilities measured? (3 elements)

Answer 70

1) The measurement date for liabilities is the settlement date. Thus, after initial recognition at fair value, liabilities are remeasured to fair value at each reporting date through the date of settlement.
2) Periodic compensation expense is based on the change (or part of the change, depending on the percentage of requisite service performed to date) in fair value of the liability.
3) Under specific circumstances, certain liability awards may be measured based on intrinsic value.

Intrinsic value = Fair value of an underlying stock – Exercise price of an option

Question 71

For stock compensation - liability-classified awards, what is the formula for intrinsic value?

Answer 71

Under specific circumstances, certain liability awards may be measured based on intrinsic value.

Intrinsic value = Fair value of an underlying stock – Exercise price of an option