Reading 9 Employee Compensation - Post-Employment and Share-Based - Answers

Question #1 of 36 Question ID: 1586075
Wonderful Manufacturing has implemented a change in its pension plan, that will increase
the future benefits for all of its current employees. Which of the following is the most likely
effect on the company's financial statements of this change in promised benefits under
current U.S. GAAP standards?
The net pension liability will increase immediately by the projected increase in
A)
pension benefits due to employees.
The pension expense for the next reporting period will increase by the
B)
projected increase in pension benefits due to employees.
The firm’s prior financial statements will be adjusted to reflect the increase in
C)
benefits.
Explanation
A plan amendment will result in an immediate increase in the PBO. Under current U.S.
accounting standards, an increase in PBO will result in an increase in the net pension
liability (decrease in funded status).
(Module 9.2, LOS 9.e)
A company is reporting a tax windfall arising from a share-based compensation plan. Which
of the following is least accurate?
A) The company would report a higher net income under U.S. GAAP.
B) The company would take the gain directly to equity under IFRS.
The company would report a lower tax expense in the income statement under
C)
IFRS.
Explanation
Tax windfalls (shortfalls) are reported directly to equity under IFRS. Under U.S. GAAP, tax
windfalls (shortfalls) reduce (increase) tax expense in the income statement.
(Module 9.1, LOS 9.b)

Which of the following is NOT an advantage of share based compensation over cash
compensation?
A) Share based compensation does not require a cash outlay.

Share based compensation serves to align employee interest with the interests
B)
of stockholders.
In a share based compensation plan, expense is not recognized, unless the
C)
exercise price is set below the market price.
Explanation
Share based compensation needs to be recognized at fair value under both U.S. GAAP and
IFRS. Intrinsic value does not matter. However, the expense does not require a cash outlay
and serves to align the interests of employees and stockholders.
Which of the following statements about the methods of valuing employee stock options is
least accurate?
Compensation expense is allocated in the income statement for the period

A)
between the grant date and the vesting date.
Once the options are in-the-money, compensation expense is recognized on the
B)
income statement.
The offset to compensation expense recognized is an increase in share-based
C)
compensation reserve.
Explanation
Compensation expense is based on the fair value of the option on the grant date. The
vesting date is the first date the employee can actually exercise the option. The
compensation is allocated in the income statement over the service period (which is the
time between the grant date and the vesting date).
For any compensation expense recognized, the offset is share-based compensation

reserve, which is a stockholders' equity account.

Which of the following statements about share-based compensation is most accurate?
A) The fair value of an option is expensed when the option is in-the-money.

Only the intrinsic value of an option is shown as an expense in the income
B)
statement.
The compensation expense is amortized over the vesting period in the income
C)
statement.
Explanation
Compensation expense is based on the fair value of the options on the grant date. The
compensation expense is then allocated straight line (i.e., amortized in equal installments)
in the income statement over the vesting period, which is the time between the grant date
and the vesting date.
The actuarial present value of all future pension benefits earned to date, based on expected
future salary increases, is called the:
A) pension liability.
B) projected benefit obligation (PBO).
C) total projected pension cost.
Explanation
The PBO is the actuarial present value (at an assumed discount rate) of all future pension
benefits earned to date, based on expected future salary increases. It measures the value
of the obligation, assuming the firm is a going concern and that the employees will
continue to work for the firm until they retire. Pension cost is periodic and not total
projected. Pension liability is the net amount of PBO and fair value of plan assets.
(Module 9.2, LOS 9.d)

Federal Companies' reports under U.S. GAAP included the following information in the
footnotes to its most recent financial statements:
Beginning Projected Benefit Obligation (PBO) $65,000,000
Beginning FV of Plan Assets 60,000,000
Service Cost 27,000,000
Interest Cost 3,000,000
Unamortized Actuarial Losses (Start of the Year) 5,000,000
Actual Return on Plan Assets 7,500,000
Expected Return on Plan Assets 8,500,000
Given the information above, calculate Federal's total periodic pension cost for the year.
A) $41,000,000.00
B) $21,500,000.00
C) $27,500,000.00
Explanation
Periodic pension cost = service cost + interest cost – expected return on plan
assets
Therefore, $27,000,000 + 3,000,000 – 8,500,000 = $21,500,000
Since the unamortized actuarial loss is less than 10% of beginning PBO, no amortization is
needed.
The number of potentially dilutive securities for the stock grant at the end of 20X1 is closest
to:
A) 25,000.
B) 16,667.
C) 21,078.
Explanation
Cash proceeds = $0.
Unrecognized compensation expense at the beginning of the year = 0 (plan just started)
Unrecognized compensation expense at the end of the first year = 400,000 – 133,333 =
$266,667
Average unrecognized share-based compensation expense = (266,667 + 0)/2 = 133,333
Assumed proceeds = 0 + 133,333 = 66,667
Number of treasury shares = assumed proceeds / average share price during the reporting
period.
= 66,667 / 17 = 3,921 shares
Dilutive shares = 25,000 – 3,922 = 21,078 shares
Which of the following statements about stock appreciation rights, performance stock, and
RSUs is most accurate?
Phantom stock payoffs are based on the performance of the firm’s actual
A)
shares.
B) Performance stock cannot be sold by the employee until vesting has occurred.
Stock appreciation rights never have any dilution effect on the existing
C)
shareholders.
Explanation
Stock appreciation rights do not cause dilution to the existing shareholders since no
shares are actually issued.
Performance stock is a type of stock grant. It is contingent on meeting performance goals

such as accounting earnings or other financial reporting metrics like return on assets or
return on equity. Unfortunately, tying performance to accounting earnings and other
metrics may result in manipulation by the employee. With restricted stock, the transferred
stock cannot be sold by the employee until vesting has occurred.
Phantom stock is similar to stock appreciation rights except the payoff is based on the
performance of hypothetical stock instead of the firm's actual shares.

For a stock grant, from the company's perspective, a tax windfall is most likely to result
when the:
A) stock price at settlement was higher than the stock price on the grant date.
B) intrinsic value at settlement was lower than the fair value on the grant date.
C) stock price at settlement was lower than the stock price on the grant date.
Explanation
Tax deduction for stock grant = share price on settlement date x number of shares vested
If the stock price on the settlement date is higher than the price on the grant date, there
would a higher tax deduction than the cumulative compensation expense reported,
resulting in a tax windfall or excess tax benefit.
In determining the fair value of employee stock options, which of the following statements is
most appropriate?
A) A higher than expected dividend yield will decrease the estimated fair value.
Absent a market-based instrument, U.S. GAAP and IFRS prefer firms to use the
B)
Black-Scholes option-pricing model.
C) Changes in fair value after the grant date is taken directly to equity.
Explanation
Dividends paid out reduce the value of the underlying shares and therefore, reduce the
value of the option.
There is no preference of a specific option-pricing model in either IFRS or U.S. GAAP.

Acceptable models should be consistent with sound economic principles, consistent with
fair value measurement requirements, and reflect all substantive elements of the grant.
Fair value is only estimated on the grant date; subsequent changes in fair value are not
considered.

An analyst views the assumptions made by a company reporting under U.S. GAAP regarding
its pension liabilities as unrealistic, and thinks the discount rate and expected rate of return
should both be increased. The most likely effect of increasing the discount rate and
expected rate of return on the pension benefit obligation (PBO) is:
Expected rate
Discount rate
of return
A) No effect Decrease
B) Decrease No effect
C) Increase Decrease
Explanation
The PBO will decrease because a higher discount rate will cause the present value of the
future obligations to decline. There will be no effect from changing the expected rate of
return because expected return relates to the pension expense, not to the size of the
obligation.
Which type of compensation is most likely to increase current liability for a company?
A) Stock-option grants.
B) Stock grants.
C) Salary and wages.
Explanation
Unpaid earned salary and wages would be shown as a current liability. Options and stock
grants do not result in a liability.
(Module 9.1, LOS 9.a)
Prisma Inc. started an employee stock option and RSU grant plan. On Jan 1, 20X1, the
company made a grant of 150,000 at-the-money options (maturing in five years) and 25,000
shares. The fair value of the options was $1.79 and the stock price on the date of the grant
was $16. Both awards vest after 3 years. The average stock price during the year was $17
and it was $17.50 at the end of the year.
Question #14 - 18 of 36 Question ID: 1586050
The expense reported for 20X1 is closest to:
A) $187,033.
B) $222,833.
C) $133,333.
Explanation
Value of the options on grant date = 1.79 x 150,000 = $268,500
Value of stock grant = 16 x 25,000 = $400,000
Both are amortized straight line over the 3-year vesting period.
Expense = (268,500+400,000) / 3 = $222,833 per year
The cash outflow reported on account of share-based compensation is:
A) $133,333.
B) $0.
C) $222,833.
Explanation
Option and stock grants have zero cash-flow implications (they are non-cash grants).
The change in stock-holder's equity at the end of 20X1 on account of the share-based
compensation is closest to:
A) $133,333.
B) $0.
C) $222,833.
Explanation
The compensation expense reduces net income and hence retained earnings. An identical
amount is taken to compensation reserve account in equity and hence there is zero net
change in equity.
For this question only, assume that the stock price on the settlement date is $18.50. This will
most likely result in a(n):
A) tax shortfall.
B) extraordinary loss.
C) tax windfall.
Explanation
If the stock price on the settlement date ($18.50) is greater than the price on the grant
date ($16), it will result in a tax windfall as a higher expense would be deductible for tax
purposes.
For this question only, suppose that Prisma reports a net loss for 20X1. Which of the
following statements is most accurate?
A) Unvested options that are out-of-money are considered dilutive.

Under the treasury method, the number of hypothetically repurchased shares is
B)
based on the share price at the end of the reporting period.
C) Prisma’s basic EPS and fully diluted EPS would be the same.
Explanation
If a company reports net loss, basic EPS and fully diluted EPS would be the same (i.e.,
dilutive securities = 0). The treasury stock method nets the number of hypothetically
repurchased shares against the total number of potentially dilutive securities. Unvested
options that are in-the-money are considered dilutive. The number of hypothetically
repurchased shares is based on the average share price during the reporting period.

For forecasting the dilution from future grants of share-based compensation and its effects
on valuation, which of the following approaches is least appropriate?
Add share-based compensation expense estimates to free cash flow estimates

A)
and increase the number of shares outstanding based on the same estimates.
Deduct share-based compensation expense from estimates of free cash flows
B)
and ignore dilution.
C) Discount the estimated value of equity by a dilution factor.
Explanation
Free cash flows are already estimated by adding share-based compensation, so adding
them again would be incorrect. The dilution from future grants can be addressed by
discounting the estimated value of equity by a dilution factor or by estimating an increase
in the number of shares outstanding. Alternatively, we can just deduct share-based
compensation expense from estimates of free cash flows and not worry about forecasting
dilutive shares.
(Module 9.1, LOS 9.c)
Under U.S. GAAP, capitalized periodic pension costs included in the value of ending
inventory is most likely:
A) to be amortized over the service lives of employees.

B) not allowed.
C) to be expensed as part of cost of goods sold when the inventory is sold.
Explanation
Pension costs included in the cost of production of goods (e.g., labor costs included in the
value of work-in-process or finished goods) may be capitalized as part of valuation of
ending inventory. When this inventory is eventually sold, such costs are expensed as a
component of cost of goods sold.

In order to decrease the projected benefit obligation (PBO) of a pension plan, which of the
following changes in pension assumptions can be made to yield the desired result?
A) Increase the expected rate of return.

B) Decrease the discount rate.
C) Decrease the rate of compensation growth.
Explanation
A decrease in the rate of compensation growth will lower future pension payments and in
turn, lower the PBO.
Wes Livingston is the founder and CEO of Bigwell Corporation. Livingston is interested in
Bigwell being acquired by a larger competitor and wants to have his company's financial
statements appear as attractive as possible to a potential suitor. In order to decrease the
projected benefit obligation (PBO) of the company's pension plan, which of the following
changes in actuarial assumptions could be made?
A) Decrease the discount rate.

B) Increase the rate of compensation growth.
C) Increase the discount rate.
Explanation
Increasing the assumed discount rate of a pension plan will result in lower projected
benefit obligation (PBO). Increasing rate of compensation growth and decreasing discount
rate would increase the PBO.

Fly-By-Night Airlines is a U.S. company planning to change its pension plan so that it can
reduce its costs. It is considering reducing its defined benefit percentage from 10% to 5% of
ending salary, retroactive for 10 years. In addition, since the firm is anticipating substantially
reduced salary increases in the future, it is planning to reduce its compensation growth rate
assumption. From a pension accounting perspective, the change in the:
Benefit percentage is a past service cost that will be amortized into and thus
A)
increase pension expense over the remaining service lives of its employees.
Benefit percentage is a change in actuarial assumption that will be recognized in
B)
full in current period pension expense.
Compensation growth rate assumption is a change in actuarial assumption that
C)
will reduce the defined benefit obligation and future pension expense.
Explanation
The change in the compensation growth rate assumption is a change in actuarial

assumption that will reduce the defined benefit obligation and future pension expense, as
the effect is amortized into pension expense over time. In this question, the change is a
reduction in both the defined benefit obligation and pension expense.
The change in the contribution percentage is not a change in actuarial assumption but a
plan amendment (which would be reflected as negative past service cost and either
amortized under US GAAP or expensed in full under IFRS).
Amortization of negative past service cost (applicable only under US GAAP) would
decrease, not increase, pension expense over the remaining service lives of its employees.
Which of the following statements regarding pension accounting is most accurate?
A reconciliation between the funded status and the net pension asset (liability)
A)
reported on the balance is required.
Changes in actuarial assumptions and past service costs fully and immediately
B)
affect the income statement.
Changes in the projected benefit obligation (PBO) and plan assets fully and
C)
immediately affect the balance sheet.
Explanation
Changes in the projected benefit obligation (PBO) and plan assets immediately affect the
funded status (difference in PBO and plan assets) and the full amount of the changes is
reflected on the balance sheet when the change occurs.
Changes in actuarial assumptions and past service costs are recognized in the income
statement over time under U.S. GAAP. Under IFRS, vested past service costs are
recognized immediately and changes in actuarial assumptions are called re-
measurements, which are taken to OCI and not amortized.
Since the funded status is equal to the net pension asset (liability) reported on the balance
sheet under no reconciliation is required.
A company reporting under U.S. GAAP reduced the discount rate for its pension obligation
from 10% to 8%, reduced the expected long-term rate of return on the assets in its pension
plan from 8% to 6%, and changed its compensation growth rate assumption from 4% to 5%.
What is the most likely impact of these changes on the current year ending defined benefit
obligation and pension expense?
The reduction in the discount rate will decrease the defined benefit obligation
A)
and will increase reported pension expense.
The decrease in the long-term rate of return on plan assets will decrease
B)
reported pension expense.
The decrease in the long-term rate of return will have no impact on the defined
C)
benefit obligation and will increase reported pension expense.
Explanation
The decrease in the expected long-term rate of return on plan assets from 8% to 6% will
have no effect on the defined benefit obligation (after all, it is an obligation and not an
asset). The reduction will, however, increase reported pension expense for current and
future periods because the expected return is subtracted while computing pension
expense.
The reduction in the discount rate from 10% to 8% will increase (not decrease) the defined
benefit obligation and will also increase reported pension expense because it will increase
the current service cost. Additionally, the actuarial gains and losses resulting from this
change (the difference between the defined benefit obligation after the increase and the
defined benefit obligation before the increase) will be amortized into pension expense
over time using the corridor approach. Amortization will start in the period after the
change is made.
The decrease in the expected long-term rate of return on its plan assets from 8% to 6%
will increase, not decrease, reported pension expense. Expected return reduces pension
expense.
The projected benefit obligation (PBO) is defined as the:
actuarial present value of all future pension benefits earned to date based on
A)
expected future salary increases.
actuarial present value of all future pension benefits earned to date and based
B)
on current salary levels.
C) actuarial future value of all post-retirement healthcare benefits earned to date.
Explanation
The projected benefit obligation (PBO) is defined as the actuarial present value of all
future pension benefits earned to date based on expected future salary increases.
A company wants to start a stock option grant for their senior executives. The most likely
impact on the company after the grant is that the leverage would be:
A) lower.
B) unchanged.
C) higher.
Explanation
Share-based compensation does not affect debt levels, nor does it change the
shareholder's equity. Compensation expense reduces net income (and retained earnings)
but would increase compensation expense reserve – leading to no net change in equity.
The period at the end of which the employee is unconditionally entitled to a compensation is
called the:
A) vesting date.
B) settlement date.
C) entitlement date.
Explanation
The vesting date is the date the employee earns (or becomes unconditionally entitled to)
the compensation.
(Module 9.1, LOS 9.a)

Jon Horton, CFA, is the Chief Financial Officer (CFO) for Springtown Corporation, a
manufacturer of windows for residential and commercial applications. As part of an ongoing
diversification strategy, Springtown Corp. has recently entered into a preliminary agreement
to purchase all of the assets of Prime Doors, a manufacturer and distributor of doors to the
same residential and commercial market in which Springtown sells its windows. Horton is
head of the due diligence team that will fully evaluate Prime Doors' financial statements
prior to the proposed acquisition.
Prime Doors has been in operation for thirty years, and currently has approximately 800
employees at two operating facilities. Horton observes in the notes to the financial
statements that Prime Doors has a defined benefit pension plan, for which all employees are
eligible. Employees are vested at the rate of 20% per year of employment, and are fully
vested upon completion of five years of employment. Springtown does not offer a pension
plan to its employees, but encourages employees to contribute to Individual Retirement
Accounts (IRAs) and offers a 401(k) program.
Horton wants to fully evaluate the financial implications of Springtown's assumption of

Prime Doors' pension assets and the associated future liabilities and expenses. Like most
companies, the pension plan for Prime Doors' employees is not fully funded, but Horton
wants to review all assumptions used by Prime Doors' accountants in the valuation of the
plan's current liabilities. The most current information regarding the pension plans is as
follows:
Select Pension Plan Information for Prime Doors (as of 12/31/05)
Projected benefit obligation (PBO) $15,500,000
Accumulated benefit obligation (ABO) $13,750,000
Market value of plan assets $11,875,000
Horton notices a paragraph in the pension plan footnotes that the original pension plan was
amended last year, effectively increasing the level of benefits to be paid to employees with
more than ten years of service. However, he is not able to detect what effect, if any, this
change in projected benefits has had on Prime Doors' financial statements or is expected to
have in the future.
Horton is aware that a commonly used method can be used to adjust the income statement
and provide a better measure of Prime Doors' economic pension cost than reported pension
expense. He is not quite sure which components of the financial statements are utilized to
derive an adjusted pension expense, but intends to investigate what analysis he can perform
to gain more insight into the company's position with regards to its pension plan.
What effect will an increased discount rate and increased expected rate of return have on a
company's projected benefit obligation (PBO) and fair value of plan assets (FVPL) as reflected
in the financial statements?
A) Both will decrease.

B) Both will increase.
C) Only one will decrease.
Explanation
The use of a higher discount rate will decrease a company's PBO. The expected rate of
return has no impact on pension obligations or the fair value of plan assets.
The number of potentially dilutive securities for the option grant at the end of 20X1 is
closest to:
A) 50,000.
B) 3,559.
C) 100,000.
Explanation
Cash proceeds = number of options x exercise price = 150,000 x 16 = $2,400,000
Unrecognized compensation expense at the beginning of the year = 0 (plan just started)
Unrecognized compensation expense at the end of the first year = 268,500 – 89,500 =
$179,000
Average unrecognized share-based compensation expense = (179,000 + 0)/2 = $89,500
Assumed proceeds = 2,400,000 + 89,500 = 2,489,500
Number of treasury shares = assumed proceeds / average share price during the reporting
period
= 2,489,500 / 17 = 146,441
Dilutive shares = 150,000 – 146,441 = 3,559

Which of the following statements regarding the projected benefit obligation (PBO) and the
value of the pension plan assets is most accurate?
If the PBO and the plan assets are the same, then nothing needs to be reported
A)
on the balance sheet.
Plan amendments during the year generally result in a decrease of the PBO at
B)
the end of the year.
The fair value of plan assets is increased by the amount of the expected return
C)
on assets.
Explanation
Neither the PBO nor the plan assets are separately reported on the balance sheet. The
funded status is the difference in the PBO and the plan assets. If the PBO exceeds the plan
assets, the difference is reported as a liability. If the plan assets exceed the PBO, the
difference is reported as an asset. If the amounts are the same, then neither a liability nor
asset needs to be reported.
Plan amendments (i.e. additional benefits provided that increase the amount of the
employer's obligation to plan participants) generally result in an increase of the PBO.
The fair value of plan assets at the beginning of the period is increased by the actual
return on plan assets as well as any employer contributions. It is reduced by the amount
of benefits paid.
Tim Gresham, CFO of Alpha Logistics is concerned about changes in the business
environment which could lead to Alpha violating some of the covenants of their outstanding
debentures. Specifically Gresham is concerned about leverage and profitability ratios.
Gresham reviews Alpha's most recent financial statements and decides that changing the
assumptions for the company's defined benefit pension plan may provide some relief in the
short-run. Alpha reports under U.S. GAAP.
Which of the following changes in the pension plan's assumptions would most likely lead to
lower reported leverage and higher reported profitability?
A) Increasing the discount rate.

B) Increasing expected return on plan assets.
C) Increasing the growth rate in compensation expense.
Explanation
Increasing discount rate leads to lower present values and reduces reported pension
liability in the balance sheet and also reduces pension expense by reducing the service
cost component. Increasing expected return on plan assets does reduce pension expense
but does not affect reported assets or liabilities. Increasing the growth rate in
compensation expense increases service cost as well as reported pension liability.
Paul Roberts, CPA, is a partner in Roberts & Smith, an accounting firm that is located in
Chicago. The firm has recently been retained by Midwest Manufacturing, a major producer
of heavy machinery and tractor parts in the U.S. Midwest has been in operation since 1965,
and currently has approximately 700 full-time employees. The company had its initial public
offering in 1986. The company has hired Roberts's firm to ensure that the accounting for
Midwest's employee pension plan is fully in compliance U.S. GAAP standards.
Selected year-end pension plan information for Midwest Manufacturing
2006 2007
PBO $21 million $23 million
Discount Rate 6.0% 7.5%
Rate of Compensation Increase 4.0% 4.0%
Benefits paid $0.8m $1m
Interest cost $1.6m
Service cost $3m
Roberts will educate Midwest's accounting department on pension plan accounting that
would be relevant to their situation.
As of January 1st, 2007, the fair value of plan assets was $19 million. Which three
components are necessary to calculate the fair value of the plan assets at the end of the
year?
A) actual return on assets, employer contributions, and benefits paid.

B) service cost, interest cost, and benefits paid.
expected return on plan assets, employer and participant contributions, and
C)
benefits paid.
Explanation
Companies are required to disclose a reconciliation of the beginning and ending balances
of the fair value of plan assets, which can be calculated as follows:
Fair value of plan assets at the beginning of the year
+ Actual return on assets
+ Employer contributions
− Benefits paid
= Fair value of plan assets at the end of the year
Current U.S. GAAP pension accounting standards require public companies to report which
of the following in the balance sheet?
A) The expected return on plan assets.

B) The pension liability adjusted for unrecognized items.
C) The funded status of the plan.
Explanation
The current standard requires companies to report the funded status of the plan, which is
the difference between the PBO and the fair value of plan assets.

As of December 31st, 2007, the fair value of plan assets was $21 million. For this question
only, assume that the sum of the unrecognized prior service cost and the unrecognized
actuarial losses equals $1.5 million. Calculate the amount attributable to Midwest's pension
plan as of December 31st, 2007 that must be reported on the balance sheet under U.S.
GAAP.
A) $2.0 million.
B) −$2.0 million.
C) −$500,000.
Explanation
The funded status is the difference between the PBO and the fair value of plan assets as of
the reporting date. For Midwest's plan, $21,000,000 − 23,000,000 = −$2,000,000. PBO
figure is already given – and it includes all unrecognized items (and hence need not be
adjusted).
Which of the following statements regarding the U.S. GAAP pension accounting standards is
most accurate?
The balance sheet will now reflect the true economic position of the pension
A) plan, but the income statement will not necessarily reflect a true measure of
economic pension expense.
For most companies, the pension liability will increase while financial leverage
B)
may increase or decrease as a result of applying the standard.
The changes in GAAP now cause U.S. standards to be consistent with the
C)
International Financial Reporting Standards (IFRS) for pension plans.
Explanation
Because deferred and unrecognized items are required to be reported on the balance
sheet but not the income statement, the balance sheet will reflect the true economic
position of the pension plan, but the income statement will not necessarily reflect a true
measure of economic pension expense. U.S. GAAP and IFRS still differ with respect to
reporting pension expense.

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Question #1 of 36 Question ID: 1586075

(Module 9.2, LOS 9.e)

Question #2 of 36 Question ID: 1586048

(Module 9.1, LOS 9.b)

A) Share based compensation does not require a cash outlay.

(Module 9.1, LOS 9.b)

Question #4 of 36 Question ID: 1586060

Compensation expense is allocated in the income statement for the period

For any compensation expense recognized, the offset is share-based compensation

(Module 9.1, LOS 9.b)

Which of the following statements about share-based compensation is most accurate?

A) The fair value of an option is expensed when the option is in-the-money.

(Module 9.1, LOS 9.b)

Question #6 of 36 Question ID: 1586064

(Module 9.2, LOS 9.d)

Question #7 of 36 Question ID: 1586067

Beginning Projected Benefit Obligation (PBO) $65,000,000

Beginning FV of Plan Assets 60,000,000

Service Cost 27,000,000

Interest Cost 3,000,000

Unamortized Actuarial Losses (Start of the Year) 5,000,000

Actual Return on Plan Assets 7,500,000

Expected Return on Plan Assets 8,500,000

Therefore, $27,000,000 + 3,000,000 – 8,500,000 = $21,500,000

(Module 9.2, LOS 9.d)

Question #8 of 36 Question ID: 1586056

Average unrecognized share-based compensation expense = (266,667 + 0)/2 = 133,333

Assumed proceeds = 0 + 133,333 = 66,667

= 66,667 / 17 = 3,921 shares

Dilutive shares = 25,000 – 3,922 = 21,078 shares

(Module 9.1, LOS 9.b)

Question #9 of 36 Question ID: 1586061

Performance stock is a type of stock grant. It is contingent on meeting performance goals

(Module 9.1, LOS 9.b)

(Module 9.1, LOS 9.b)

Question #11 of 36 Question ID: 1586059

There is no preference of a specific option-pricing model in either IFRS or U.S. GAAP.

(Module 9.1, LOS 9.b)

Question #12 of 36 Question ID: 1586071

(Module 9.2, LOS 9.d)

Question #13 of 36 Question ID: 1586043

(Module 9.1, LOS 9.a)

The expense reported for 20X1 is closest to:

Value of the options on grant date = 1.79 x 150,000 = $268,500

Value of stock grant = 16 x 25,000 = $400,000

Expense = (268,500+400,000) / 3 = $222,833 per year

(Module 9.1, LOS 9.b)

Question #15 - 18 of 36 Question ID: 1586051

The cash outflow reported on account of share-based compensation is:

(Module 9.1, LOS 9.b)

Question #16 - 18 of 36 Question ID: 1586052

(Module 9.1, LOS 9.b)

Question #17 - 18 of 36 Question ID: 1586053

(Module 9.1, LOS 9.b)

Question #18 - 18 of 36 Question ID: 1586054

A) Unvested options that are out-of-money are considered dilutive.

(Module 9.1, LOS 9.b)

Add share-based compensation expense estimates to free cash flow estimates

(Module 9.1, LOS 9.c)

Question #20 of 36 Question ID: 1586068