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Chapter 16: 12Q (page 874)

What date or event does the profession believe should be used in determining the value of a stock option? What arguments support this position?

Short Answer

Expert verified

The profession recommends that fair value of a stock option be up in the air on the date on which the option is conceded to a particular individual.

It is the value of the option at the grant date, rather than the grantor's conclusive gain or loss on the monetary exchange, which for the end goal of accounting includes anything the grantor hopes to pay.

Step by step solution

01

The date norms regarding valuation of stock option to be followed 

The profession believes that the date or event should be used in fair value of a stock option. It is a reference to the assessed worth of an organization's stock that are recorded on an organization's financial statement.

02

The argument that will support the above statement is

On the date the option is conceded, the corporation foregoes the alternative of selling shares at the then common price. Market price on the date of grant might be ventured to be the worth which the employer had as a top priority. It is the value of the option at the date of grant, rather than the grantor's definitive gain or loss on the financial exchange, which for accounting purposes comprises anything the grantor expects to pay.

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Most popular questions from this chapter

Accounting for Restricted Stock) Derrick Company issues 4,000 shares of restricted stock to its CFO, Dane Yaping, on January 1, 2017. The stock has a fair value of \(120,000 on this date. The service period related to this restricted stock is 4 years. Vesting occurs if Yaping stays with the company for 4 years. The par value of the stock is \)5. At December 31, 2018, the fair value of the stock is $145,000.

Instructions

(a) Prepare the journal entries to record the restricted stock on January 1, 2017 (the date of grant), and December 31, 2018.

(b) On March 4, 2019, Yaping leaves the company. Prepare the journal entry (if any) to account for this forfeiture.

EXCEL (Stock-Option Plan) Berg Company adopted a stock-option plan on November 30, 2016, that provided that 70,000 shares of \(5 par value stock be designated as available for the granting of options to officers of the corporation at a price of \)9 a share. The market price was \(12 a share on November 30, 2017.

On January 2, 2017, options to purchase 28,000 shares were granted to president Tom Winter鈥�15,000 for services to be rendered in 2017 and 13,000 for services to be rendered in 2018. Also on that date, options to purchase 14,000 shares were granted to vice president Michelle Bennett鈥�7,000 for services to be rendered in 2017 and 7,000 for services to be rendered in 2018. The market price of the stock was \)14 a share on January 2, 2017. The options were exercisable for a period of one year following the year in which the services were rendered. The fair value of the options on the grant date was \(4 per option.

In 2018, neither the president nor the vice president exercised their options because the market price of the stock was below the exercise price. The market price of the stock was \)8 a share on December 31, 2018, when the options for 2017 services lapsed.

On December 31, 2019, both president Winter and vice president Bennett exercised their options for 13,000 and 7,000 shares, respectively, when the market price was $16 a share.

Instructions

Prepare the necessary journal entries in 2016 when the stock-option plan was adopted, in 2017 when options were granted, in 2018 when options lapsed, and in 2019 when options were exercised.

Question: . Mae Jong Corp. issues \(1,000,000 of 10% bonds payable which may be converted into 10,000 shares of \)2 par value ordinary shares. The market rate of interest on similar bonds is 12%. Interest is payable annually on December 31, and the bonds were issued for total proceeds of $1,000,000. In accounting for these bonds, Mae Jong Corp. will:

(a) first assign a value to the equity component, then determine the liability component.

(b) assign no value to the equity component since the conversion privilege is not separable from the bond.

(c) first assign a value to the liability component based on the face amount of the bond.

(d) use the 鈥渨ith-and-without鈥� method to value the compound instrument.

Bridgewater Corp. offered holders of its 1,000 convertible bonds a premium of \(160 per bond to induce conversion into shares of its common stock. Upon conversion of all the bonds, Bridgewater Corp. recorded the \)160,000 premium as a reduction of paid-in capital. Comment on Bridgewater鈥檚 treatment of the $160,000 鈥渟weetener.鈥�

(EPS: Simple Capital Structure) At January 1, 2017, Langley Company鈥檚 outstanding shares included the following.

280,000 shares of \(50 par value, 7% cumulative preferred stock

900,000 shares of \)1 par value common stock

Net income for 2017 was \(2,530,000. No cash dividends were declared or paid during 2017. On February 15, 2018, however, all preferred dividends in arrears were paid, together with a 5% stock dividend on common shares. There were no dividends in arrears prior to 2017.

On April 1, 2017, 450,000 shares of common stock were sold for \)10 per share, and on October 1, 2017, 110,000 shares of common stock were purchased for $20 per share and held as treasury stock.

Instructions

Compute earnings per share for 2017. Assume that financial statements for 2017 were issued in March 2018.
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