Ch.19

Gregory's on​ Ormond, Inc. grants its president​ 2,000 stock options on January​ 1, Year 1 that give him rights to purchase shares of the company for​ $40 per share on December​ 31, Year 2. At the time the options were​ granted, the fair value of the options totaled​ $20,000. At December​ 31, Year 1 the​company's stock sold for​ $45 per share and at December​ 31, Year 2 the selling price of the stock was​$55 per share. In its Year 2 financial​ statements, Gregory's on Ormond would recognize compensation expense relative to the options​ of:

10,000

On January​ 1, Year​ 1, Davenport Corporation granted an employee 20,000 options to purchase 20,000 shares of​ Davenport's $10 par common stock at​ $30 per share. The options became exercisable on December​ 31, Year​ 3, after the employee completed three years of service. The option was exercised on February​ 1, Year 4. The market prices of​ Davenport's stock were as​ follows: January​ 1, Year​ 1, $40; December​ 31, Year​ 3, $60; and February​ 1, Year​ 4, $55. An options pricing model estimated the value of the options at $18 each on the grant date. For Year​ 1, Davenport should recognize compensation expense of​

120,000

Do It​ Right, Inc.'s actuary provided the company with the following information regarding its defined benefit pension plan for the year ended December​ 31, year​ 7: Fair value of plan assets ​$5,580,000 Accumulated benefit obligation ​3,400,000 Projected benefit obligation ​4,930,000 Unrecognized prior service cost ​400,000 Unrecognized net gain ​140,000 Expected benefit obligation dash- Year 8 ​250,000 The company reported net periodic pension cost of​ $310,000 on its income statement and made a​$500,000 contribution to the pension plan during year 7. The​ company's effective tax rate is​ 40%. What amount should Do It Right report in accumulated other comprehensive income related to its pension plan on the December​ 31, year 7 balance​ sheet?

156,000

On January​ 1, Year​ 1, Fields Corporation granted 200,000 stock options to certain executives. The vesting period is 3 years. The options are exercisable no sooner than December​ 31, Year 3 and expire on January​ 1, Year 7. Each option can be exercised to acquire one share of​ $10 par common stock for​$15. An appropriate option−pricing model estimates the fair value of each option to be $12 on the date of grant. What is the fair value of the​ award?

2,400,000

On January​ 1, 2017, Bubert Corporation issues​ 8,500 shares of​ $2 par restricted stock to its key executives. The market value of unrestricted shares of the same stock on the date of issue is​ $25 and there is a four year vesting period. What is the amount of deferred compensation recorded on January​1, 2017?

212,500

The following information applies to Babydoll​ Company's defined benefit pension​ plan: The​ company's employees have an average remaining service life of 10 years. The company has no unrecognized net gains or losses. What is​ Babydoll's net periodic pension cost for Year​ 8?

230,000

The following information applies to Babydoll​ Company's defined benefit pension plan at December​31, Year​ 8: The​ company's employees have an average remaining service life of 10 years. The company has no unrecognized net gains or losses. What is the funded status of​ Babydoll's pension plan at December​31, year​ 7?

250,000 underfunded.

Giant​ Jobs, Inc. amended its overfunded pension plan on December​ 31, Year​ 7, resulting in the recognition of prior service cost of​ $700,000. On December​ 31, Year​ 7, Giant​ Job's employees had an average remaining service life of 20 years. The company has an effective tax rate of​ 30%. How should the prior service cost be reported in the December​ 31, Year 7 financial​ statements?

490,000 decrease in comprehensive income.

On January​ 1, Year​ 1, Sweeney Company granted an employee options to purchase 100 shares of​Sweeney's common stock at​ $40 per share. The options became exercisable on December​ 31, Year​1, after the employee had completed 1 year of service and were exercised on that date. Market prices of the stock and fair values of the options were as​ follows: What amount should Sweeney recognize as compensation cost for Year​ 1?

6,100

On January​ 1, Year​ 1, Axis Corporation granted employees​ 48,000 stock options for​ 48,000 shares of​$2 par value common stock. The exercise price on the date of issue was equal to the market price of​$23. There is a two year vesting period and the options expire in four years. Employees have the right to sell back the shares to the corporation within six months of exercise. The fair value of the options has been estimated to be​ $31 per option and the company does not expect any forfeitures of the options. What is the amount of compensation expense for Year​ 1?

744,000

On January​ 1, Year​ 1, Freeman Corporation granted​ 120,000 stock options to key employees which allowed these employees to purchase​ 120,000 shares of the​ corporation's common stock at​ $30 per share. These options are intended to compensate employees for the next three years. The options may be exercised within a four−year period beginning January​ 1, Year​ 4, by the grantees still employed by the company. No options were terminated during Year​ 1, but Freeman does have an experience of​ 5% forfeitures over the life of the stock options. Freeman uses the estimated forfeiture rate to estimate compensation expense. The market price of the stock was​ $35 per share at the date of grant. Freeman used an appropriate pricing model and estimated the value of an option at​ $20. What amount should be charged to compensation expense for the year ended December​ 31, Year​ 1?

760,000

On January​ 1, Year​ 1, Axis Corporation granted employees​ 66,000 stock options for​ 66,000 shares of​$3 par value common stock. The exercise price on the date of issue was equal to the market price of​$20. There is a two year vesting period and the options expire in four years. Employees have the right to sell back the shares to the corporation within six months of exercise. The fair value of the options has been estimated to be​ $39 per option and the company does not expect any forfeitures of the options. At the end of Year​ 2, the fair value of each option is​ $44. What is the journal entry for compensation expense for Year​ 2?

Compensation Expense ​1,617,000 Liability for Stock−based Compensation ​1,617,000

How is interest cost calculated for a defined benefit pension​ plan?

Multiply the beginning balance PBO by the settlement rate.

On January​ 1, 2017, Cable Corporation issues​ 15,000 stock−appreciation rights to its key executives. The terms of the plan state that the holders of the rights will receive a cash payment equal to the difference between the market price of the stock on the date of exercise and the premium −established price of​ $9 per share. There is a three−year vesting period and the rights may be exercised on January​ 1, 2020. The rights expire on January​ 1, 2022. The closing market prices​ follow: December​ 31, 2017 ​ $12per share December​ 31, 2018​ $15 per share December​ 31, 2019​ $13 per share What is the appropriate journal entry on December​ 31, 2019?​

No Journal entry or Obligation under SAR Plan ​50,000 Cash ​50,000

For an equity−classified award of stock​ options, what journal entry is made at the date of​ grant?

No journal entry

Apple Plumbing reports actual returns on plan assets of​ $200,000, while the expected return was​$181,000. In​ addition, an employee wellness program has resulted in changes in actuarial assumptions that result in an increase in the PBO of​ $24,000. What is the journal entry to record the change in actuarial​ assumptions?

OCI minus− Actuarial​ Gains/Losses ​24,000 Projected Benefit Obligation ​24,000

Merciful Industries has a beginning PBO balance of $700,000 and a settlement rate of 6​%. As a result of an amendment to the current union​ contract, there are prior service costs of $34,000. What is the journal entry to record interest expense on the pension​ obligation?

Pension Expense 44,040 Projected Benefit Obligation 44,040

Merciful Industries has a beginning PBO balance of​ $600,000 and a settlement rate of​ 6%. What is the journal entry to record interest expense on the pension​ obligation?

Pension Expense ​36,000 Projected Benefit Obligation ​36,000

Merciful Industries has a beginning PBO balance of​ $900,000 and a settlement rate of​ 6%. The expected return is​ 7%. The beginning balance of pension plan assets is​ $1,000,000. What is the journal entry to record the expected return on plan​ assets?

Pension Plan Assets ​70,000 Pension Expense − Expected Return ​70,000

Which of the following statements about liability−classified awards is true​?

The value of a liability−classified award is typically based on the​ company's equity.

The first step in measuring compensation expense from granting employee stock options is to determine the fair value on the date of grant.

True

The value of stock options expected to be forfeited reduce compensation expense.

True

When liability−classified stock options​ expire, additional paid−in capital is increased.

True

The compensation associated with a share of stock under a restricted stock plan is computed as​

the market price of an unrestricted share of the same stock

An employee will not redeem a liability−classified award when the stock is out of the money.

true

Premier Sports Inc has a beginning PBO balance of $605,000 and a beginning market−related value of plan assets of $540,000. The net actuarial gain at the beginning of the period is 89,500 and the average employee base has a remaining service life of 20 years. What is the required amortization of actuarial gains or losses for the current​ year?

1,450

On January​ 1, Year​ 1, Fields Corporation granted 500,000 stock options to certain executives. The options are exercisable no sooner than December​ 31, Year 3 and expire on January​ 1, Year 7. The vesting period is 3 years. Each option can be exercised to acquire one share of​ $10 par common stock for​ $15. An appropriate option−pricing model estimates the fair value of each option to be $9 on the date of grant. What amount should Fields recognize as compensation expense for Year​ 1?

1,500,000

On January​ 1, Year​ 1, Gallagher Corporation issued​ 700,000 stock options for​ 700,000 shares to a division manager. The options have an estimated fair value of​ $10 each. These options are not exercisable unless division revenue increases by​ 8% in four years. Gallagher estimates that it is probable that the goal will be achieved. What is pretax compensation expense for year​ 1?

1,750,000

The following information relates to the pension plan for the employees of Neal​ Co. Neal estimates that the average remaining service life is 16 years.​ Neal's contribution was​ $315,000 in Year 5 and benefits paid were​ $235,000. The amount of unrecognized net gain amortized in Year 5​ is:

12,750

The following information pertains to Burnel​ Corporation's defined benefit pension plan for Year​ 1: Service ​$160,000 Actual and expected gain on plan assets ​35,000 Unexpected loss on pension plan assets related to a Year 1 disposal of a subsidiary ​40,000 Amortization of unrecognized prior service cost ​5,000 Annual interest on pension obligation ​50,000 What amount should Burnel report as total pension expense in Year​ 1?

180,000

Which of the following statements about defined benefit pension plans is​ correct?

Deferring actuarial gains and losses tends to smooth earnings

Which of the following statements regarding stock options is​ true?

Employee stock options are a restricted form of a call option.

The fixed price paid by an employee to acquire a share of stock under an option plan is the​ ________.

Exercise price

In a noncontributory pension​ plan, employees must fund some or all pension benefits.

False

The initial journal entry to record an equityminus−classified award of stock options increases​ stockholders' equity on the balance sheet.

False

Merciful Industries has a beginning PBO balance of​ $500,000 and a settlement rate of​ 6%. As a result of an amendment to the current union​ contract, there are prior service costs of​ $49,000. What is the journal entry to record the change to the current union​ contract?

Other Comprehensive Income−Prior Service Costs ​49,000 Projected Benefit Obligation ​49,000

If a pension plan is​ overfunded, it means that the​

PBO is less than plan assets

Accountants must make a judgment about the probability of forfeiture in a stock−based compensation plan.

True

An underfunded pension plan increases a​ company's leverage.

True

The accumulated benefit obligation reflects only current salary levels.

True

The difference between pension plan assets and the PBO is equal to the funded status of the plan.

True

Under a defined−benefit ​plan, the contribution is fixed but benefits can vary.

false

Amortizing a net actuarial gain for pensions will​ ________.

increase retained earnings and decrease accumulated other comprehensive income

Which of the following is a characteristic of the projected benefit obligation​ measurement?

it uses projected future salary levels.

The projected benefit obligation​ (PBO) is decreased by​ ________.

payment of retirement benefits

Among Fortune 500​ companies, which of the following compensation plans is most​ common?

stock options

The compensation associated with equity classified awards of stock options is​ ________.

the estimated fair value of the options