On December 29, 2015, Kolek Company granted 100,000 stock options to a group of 100 employees, enabling each employee to buy 1,000 shares for $20 per share. On the grant date, the shares had a market value of $16 per share and the options had a market value of $3.00 per option. The options vest over a 3-year period and become exercisable on January 1, 2019. Kolek Company expects that, based on historical turnover, they will lose approximately 3 of the employees receiving the options per year during the vesting period. Compensation expense will be recognized uniformly over the vesting period.

Assuming all 100,000 options are exercised, what will be the net increase or decrease in stockholdersâ equity as a result of the granting and exercising of the options.

a. A decrease of $300,000
b. An increase of $2,000,000
c. An increase of $1,700,000
d. An increase of $2,300,000

aquamarinebear568

Smaller Corporation has been in operation for several years. Each year, around the holidays, Smaller gives a cash bonus to each of its employees and records the bonuses as compensation expense. Smaller has reached the point at which it is now making a reasonable return on its shareholders' equity. At the end of the current year, the company president is considering establishing a compensatory share option plan for Smaller's key executives, instead of paying cash bonuses to any of its employees. At this time, the market price and the planned option (exercise) price of the company's common stock are the same. The plan would allocate a specified number of options to each executive based on the executive's level within the company and meeting Smaller's targeted income goals. The service period would be 3 years and the options would have to be exercised within 10 years.

You are the controller for Smaller and one of the key executives who would participate in the plan. You also already own a substantial number of shares of Smaller common stock. The company president comes to you for advice about this plan and says, âIf Smaller establishes this plan, it will work out for all of us. It looks like the plan is pretty valuable, since an option pricing model shows a high fair value for each option. The corporation will be saving cash because it won't have to pay bonuses to either the executives or the other employees. But executives will manage better because their share options will depend on meeting the company's targeted income. Because the market price and the option price are the same, there won't be any compensation cost or expense related to this plan. Furthermore, since no bonuses would be paid to any employees, the corporation will decrease its compensation expense. This will increase its net income and earnings per share compared to last year, as well as its return on shareholders' equity. So the stock value will go up. This seems like a win-win situation for everyone. Am I right on this?â Do you think Smaller should adopt this compensatory share option plan?

Required:

From financial reporting and ethical perspectives, how would you reply to the president?

greenbear620

Smaller Corporation has been in operation for several years. Each year, around the holidays, Smaller gives a cash bonus to each of its employees and records the bonuses as compensation expense. Smaller has reached the point at which it is now making a reasonable return on its shareholders' equity. At the end of the current year, the company president is considering establishing a compensatory share option plan for Smaller's key executives, instead of paying cash bonuses to any of its employees. At this time, the market price and the planned option (exercise) price of the company's common stock are the same. The plan would allocate a specified number of options to each executive based on the executive's level within the company and meeting Smaller's targeted income goals. The service period would be 3 years and the options would have to be exercised within 10 years.

You are the controller for Smaller and one of the key executives who would participate in the plan. You also already own a substantial number of shares of Smaller common stock. The company president comes to you for advice about this plan and says, âIf Smaller establishes this plan, it will work out for all of us. It looks like the plan is pretty valuable, since an option pricing model shows a high fair value for each option. The corporation will be saving cash because it won't have to pay bonuses to either the executives or the other employees. But executives will manage better because their share options will depend on meeting the company's targeted income. Because the market price and the option price are the same, there won't be any compensation cost or expense related to this plan. Furthermore, since no bonuses would be paid to any employees, the corporation will decrease its compensation expense. This will increase its net income and earnings per share compared to last year, as well as its return on shareholders' equity. So the stock value will go up. This seems like a win-win situation for everyone. Am I right on this?â Do you think Smaller should adopt this compensatory share option plan?

Required:

From financial reporting and ethical perspectives, how would you reply to the president?

coffeegnat771

ACCT 3312 Lecture Notes - Lecture 1: Deferred Compensation, The Employer, Pension

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