You are assistant controller of Stamos & Company, a medium-size manufacturer of machine parts. On October 22, 2015, the board of directors approved a stock option plan for key executives. On January 1, 2016, a specific number of stock options were granted. The options were exercisable between January 1, 2018, and December 31, 2022, at 100% of the quoted market price at the grant date. The service period is for 2016 through 2018. Your boss, the controller, is one of the executives to receive options. Neither he nor you have had occasion to deal with GAAP on accounting for stock options. He and you are aware of the traditional approach your company used years ago but do not know the newer method. Your boss understands how options might benefit him personally but wants to be aware also of how the options will be reported in the financial statements. He has asked you for a one-page synopsis of accounting for stock options under the fair value approach. He instructed you, “I don’t care about the effect on taxes or earnings per share—just the basics, please.” Required: Prepare such a report that includes the following: 1. At what point should the compensation cost be measured? How should it be measured? 2. How should compensation expense be measured for the stock option plan in 2016 and later? 3. If options are forfeited because an executive resigns before vesting, what is the effect of that forfeiture of the stock options on the financial statements? 4. If options are allowed to lapse after vesting, what is the effect on the financial statements?

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
icon
Related questions
Question
100%

You are assistant controller of Stamos & Company, a medium-size manufacturer of machine parts. On October
22, 2015, the board of directors approved a stock option plan for key executives. On January 1, 2016, a specific
number of stock options were granted. The options were exercisable between January 1, 2018, and December 31,
2022, at 100% of the quoted market price at the grant date. The service period is for 2016 through 2018.
Your boss, the controller, is one of the executives to receive options. Neither he nor you have had occasion to
deal with GAAP on accounting for stock options. He and you are aware of the traditional approach your company
used years ago but do not know the newer method. Your boss understands how options might benefit him personally
but wants to be aware also of how the options will be reported in the financial statements. He has asked you
for a one-page synopsis of accounting for stock options under the fair value approach. He instructed you, “I don’t
care about the effect on taxes or earnings per share—just the basics, please.”
Required:
Prepare such a report that includes the following:
1. At what point should the compensation cost be measured? How should it be measured?
2. How should compensation expense be measured for the stock option plan in 2016 and later?
3. If options are forfeited because an executive resigns before vesting, what is the effect of that forfeiture of the
stock options on the financial statements?
4. If options are allowed to lapse after vesting, what is the effect on the financial statements?

Expert Solution
trending now

Trending now

This is a popular solution!

steps

Step by step

Solved in 2 steps

Blurred answer
Knowledge Booster
Accounting for Employee Compensations and Benefits
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.
Similar questions
Recommended textbooks for you
FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
Accounting
ISBN:
9781259964947
Author:
Libby
Publisher:
MCG
Accounting
Accounting
Accounting
ISBN:
9781337272094
Author:
WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:
Cengage Learning,
Accounting Information Systems
Accounting Information Systems
Accounting
ISBN:
9781337619202
Author:
Hall, James A.
Publisher:
Cengage Learning,
Horngren's Cost Accounting: A Managerial Emphasis…
Horngren's Cost Accounting: A Managerial Emphasis…
Accounting
ISBN:
9780134475585
Author:
Srikant M. Datar, Madhav V. Rajan
Publisher:
PEARSON
Intermediate Accounting
Intermediate Accounting
Accounting
ISBN:
9781259722660
Author:
J. David Spiceland, Mark W. Nelson, Wayne M Thomas
Publisher:
McGraw-Hill Education
Financial and Managerial Accounting
Financial and Managerial Accounting
Accounting
ISBN:
9781259726705
Author:
John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting Principles
Publisher:
McGraw-Hill Education