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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?
From financial reporting and ethical perspectives, how would you reply to the president?
Hi everyone, I need some help with my paper for Tax Class, here what the assignment looks like:
The purpose of this tax research assignment is to help you develop skills in researching tax issues. Please answer both of the questions below. The final deliverable for this project will be a written memo which should be at least 2 pages double-spaced, 12 point font, 1â margins. The assignment is due in your Assignments Folder by 11:59 p.m. on the designated due date.
Mandatory Question #2:
Partnership Question: Ashlee, Hiroki, Kate, and Albee LLC each own a 25 percent interest in Tally Industries LLC, which generates annual gross receipts of over $10 million. Ashlee, Hiroki, and Kate manage the business, but Albee LLC is a nonmanaging member. Although Tally Industries has historically been profitable, for the last three years losses have been allocated to the members. Given these facts, the members want to know whether Tally Industries can use the cash method of accounting. Why or why not?
Thank you in advance.