Lesson 30 Flashcards
what is stock based compensation
long term compensation plans that give employees an equity interest
What is a stock option
gives employees the option to purchase common stock at a given price over an extended period of time
what is a grant date
the date you receive the options
what is intrinsic value method
an approach that measures what the holder would receive today if the option was immediately exercised.
Intrinsic value is the difference between what at the grant date.
the difference between the market price of the stock and the exercise price of the options
what is the fair value method with regards to stock options
companies use acceptable option pricing models to value the options at the date of grant.
what is a service period
where a company recognizes compensation expense in the periods in which its employees perform the service.
What is restricted stock plans
transfers shares of stock to employees, subject to an agreement that the shares cannot be sold, transferred, or pledged until vesting occurs.
What are the 3 advantages of restricted stock plans
- never becomes completely worthless
- generally results in less dilution to existing stockholder
- better aligns the employee incentives with the companies’ incentives
What is employee stock purchase plans (ESPP)
they generally permit all employees to purchase stock at a discounted price for a short period of time
When is the compensation expense resulting from a compensatory stock option plan generally reported?
When it is allocated to the periods benefited by the employee’s required service
Correct. In general, a company recognizes compensation expense in the periods in which its employees perform the service—the service period. Unless otherwise specified, the service period is the vesting period—the time between the grant date and the vesting date. Thus, the company determines total compensation cost at the grant date and allocates it to the periods benefited by its employees’ services.
On January 1, 2021 Reese Company granted Jack Buchanan, an employee, an option to buy 300 shares of Reese Co. stock for $40 per share, the option exercisable for 5 years from date of grant. Using a fair value option pricing model, total compensation expense is determined to be $4,800. Buchanan exercised his option on September 1, 2021, and sold his 300 shares on December 1, 2021. Quoted market prices of Reese Co. stock during 2021 were: January 1 $40 per share September 1 $48 per share December 1 $54 per share The service period is for two years beginning January 1, 2021.
As a result of the option granted to Buchanan, using the fair value method, what value should Reese recognize as compensation expense for 2021?
$2,400
Correct. A company recognizes compensation expense in the periods in which its employees perform the service—the service period. Unless otherwise specified, the service period is the vesting period—the time between the grant date and the vesting date. Thus, the company determines total compensation cost at the grant date and allocates it to the periods benefited by its employees’ services. In this case, the compensation expense of $4,800 is divided by the service period of 2 years. The compensation expense for 2021 is $2,400.
