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(Stock-Based Compensation) Assume that Amazon.com has a stock-option plan for top management. Each

stock option represents the right to purchase a share of Amazon \(1 par value common stock in the future at a price equal to the

fair value of the stock at the date of the grant. Amazon has 5,000 stock options outstanding, which were granted at the beginning

of 2017. The following data relate to the option grant.

Exercise price for options \)40

Market price at grant date (January 1, 2017) \(40

Fair value of options at grant date (January 1, 2017) \)6

Service period 5 years

Instructions

(a) Prepare the journal entry(ies) for the first year of the stock-option plan.

(b) Prepare the journal entry(ies) for the first year of the plan assuming that, rather than options, 700 shares of restricted

stock were granted at the beginning of 2017.

(c) Now assume that the market price of Amazon stock on the grant date was $45 per share. Repeat the requirements for

(a) and (b).

(d) Amazon would like to implement an employee stock-purchase plan for rank-and-file employees, but it would like to

avoid recording expense related to this plan. Which of the following provisions must be in place for the plan to avoid

recording compensation expense?

(1) Substantially all employees may participate.

(2) The discount from market is small (less than 5%).

(3) The plan offers no substantive option feature.

(4) There is no preferred stock outstanding

Short Answer

Expert verified

The compensation expense for the first year is $6,000.

Step by step solution

01

Entry for the first year stock-option plan

Date

Particulars

Debit

Credit

January 1, 2017

No Entry

December 31, 2017

Compensation Expense

$6,000

Paid in Capital- Stock Option

$6,000

(Being entry for the record compensation expense)

02

Entry for first-year plan

Date

Particulars

Debit

Credit

January 1, 2017

Unearned Compensation

$28,000

Common Stock

700

Paid in Capital more than Par

$27,300

(Being entry for the shares granted)

December 31, 2017

Compensation Expense

$5,600

Unearned Compensation

$5,600

(Being entry for compensation expense)

03

Journal entry when the price is changed

No change in the part (a) unless the fair value of the option changed

For part (b)

Date

Particulars

Debit

Credit

January 1, 2017

Unearned Compensation

$31,500

Common Stock

700

Paid in Capital in Excess of Par

$30,800

(Being entry for the shares granted)

December 31, 2017

Compensation Expense

$6,300

Unearned Compensation

$6,300

(Being entry for compensation expense)

04

Correct criteria

The first three criteria are the criteria that must be met for an employee stock purchase plan to be non-compensatory. The fourth provision is irrelevant.

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Most popular questions from this chapter

The information below pertains to Barkley Company for 2018.

Net income for the year \(1,200,000

7% convertible bonds issued at par (\)1,000 per bond); each bond is convertible into

30 shares of common stock 2,000,000

6% convertible, cumulative preferred stock, \(100 par value; each share is convertible

into 3 shares of common stock 4,000,000

Common stock, \)10 par value 6,000,000

Tax rate for 2018 40%

Average market price of common stock \(25 per share

There were no changes during 2018 in the number of common shares, preferred shares, or convertible bonds outstanding. There is no treasury stock. The company also has common stock options (granted in a prior year) to purchase 75,000 shares of common stock at \)20 per share.

Instructions

(a) Compute basic earnings per share for 2018.

(b) Compute diluted earnings per share for 2018

E16-28 (L05) (EPS with Warrants) Howat Corporation earned \(360,000 during a period when it had an average of 100,000 shares of common stock outstanding. The common stock sold at an average market price of \)15 per share during the period. Also outstanding were 15,000 warrants that could be exercised to purchase one share of common stock for $10 for each warrantexercised.

Instructions

(a) Are the warrants dilutive?

(b) Compute basic earnings per share.

(c) Compute diluted earnings per share.

What are the computational guidelines for determining whether a convertible security is to be reported as part of diluted earnings per share?

Briefly explain the accounting requirement for stock compensation plans under GAAP.

CA16-2 ETHICS (Ethical Issuesโ€”Compensation Plan) The executive officers of Rouse Corporation have a performance-based compensation plan. The performance criteria of this plan is linked to growth in earnings per share. When annual EPS growth is 12%, the Rouse executives earn 100% of the shares; if growth is 16%, they earn 125%. If EPS growth is lower than 8%, the executives receive no additional compensation.

In 2014, Joan Devers, the controller of Rouse, reviews year-end estimates of bad debt expense and warranty expense. She calculates the EPS growth at 15%. Kurt Adkins, a member of the executive group, remarks over lunch one day that the estimate of bad debt expense might be decreased, increasing EPS growth to 16.1%. Devers is not sure she should do this because she believes that the current estimate of bad debts is sound. On the other hand, she recognizes that a great deal of subjectivity is involved in the computation.

Instructions

Answer the following questions.

(a) What, if any, is the ethical dilemma for Devers?

(b) Should Deversโ€™s knowledge of the compensation plan be a factor that influences her estimate?

(c) How should Devers respond to Adkinsโ€™s request?

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