ExpertHard1 markMultiple Choice
CPA · Question 27 · Area II: Technical Accounting
On Jan 1, Year 1, a company grants 1,000 Stock Appreciation Rights (SARs) to an executive. The SARs settle in cash. <br/>- Service period: 3 years.<br/>- Fair Value per SAR at Dec 31, Year 1: $12.<br/>- Fair Value per SAR at Dec 31, Year 2: $15.<br/><br/>What is the compensation expense for Year 2?
On Jan 1, Year 1, a company grants 1,000 Stock Appreciation Rights (SARs) to an executive. The SARs settle in cash. <br/>- Service period: 3 years.<br/>- Fair Value per SAR at Dec 31, Year 1: $12.<br/>- Fair Value per SAR at Dec 31, Year 2: $15.<br/><br/>What is the compensation expense for Year 2?
Answer options:
A.
$5,000
B.
$10,000
C.
$6,000
D.
$15,000
How to approach this question
Liability Award: Remeasure FV at each reporting date. Calculate cumulative required liability based on % of service complete. Expense = Change in liability.
Full Answer
C.$6,000✓ Correct
Liability at end of Year 2 = 1,000 units * $15 * (2/3 vested) = $10,000. Liability at end of Year 1 = 1,000 units * $12 * (1/3 vested) = $4,000. Expense for Year 2 = $10,000 - $4,000 = $6,000.
Common mistakes
Calculating expense based on the full FV change without adjusting for the vesting percentage; forgetting to subtract prior year liability.
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