CPA Financial Accounting and Reporting Far Quiz: Account For Stock Based Compensation

What this quiz covers

This quiz focuses on Account For Stock Based Compensation, giving you a quick way to practice the rules, question types, and explanations that matter most for CPA Financial Accounting and Reporting Far.

How to use this quiz

Try each quiz question before looking at the correct answer. Use the explanations to review missed ideas, then come back to similar questions until the pattern feels familiar.

Question 1

1. No adjustment is made; all expense is recognized regardless of forfeitures.
2. Previously recognized compensation expense is reversed for the forfeited options. (correct answer)
3. The forfeiture increases compensation expense in the period the options are forfeited.
4. Forfeitures reduce Additional Paid-In Capital directly with no income statement impact.

Explanation: Under ASC 718 (as amended by ASU 2016-09), an entity may elect to account for forfeitures as they occur. When options are forfeited before vesting, previously recognized compensation expense for those options is reversed in the period of forfeiture. Answer B is correct. Answer A describes the alternative of estimating forfeitures (also permitted but not the only approach). Answer C increases rather than decreases expense upon forfeiture. Answer D bypasses the income statement, which is incorrect - the reversal runs through compensation expense.

Question 2

1. Equity awards, measured at grant-date fair value.
2. Equity awards, remeasured each reporting period.
3. Liability awards, remeasured at fair value each reporting period until settlement. (correct answer)
4. Liability awards, measured at intrinsic value on the settlement date only.

Explanation: Under ASC 718, awards that require or may require settlement in cash are classified as liabilities. Cash-settled SARs are liability awards and must be remeasured at fair value at each reporting date until settlement. Changes in fair value are recognized as compensation expense in the period of change. Answer C is correct. Answers A and B classify them as equity awards. Answer D correctly identifies them as liability awards but uses intrinsic value only at settlement, not fair value remeasured each period.

Question 3

1. Compensation expense is recorded for the intrinsic value of the options on the exercise date.
2. Cash is debited, Additional Paid-In Capital - Stock Options is reclassified to Common Stock and APIC, and no additional compensation expense is recorded. (correct answer)
3. A gain is recorded for the difference between the exercise price and the market price at exercise.
4. The exercise price received is credited directly to Retained Earnings.

Explanation: When stock options are exercised, the company receives the exercise price (debit Cash), removes the balance in APIC-Stock Options (debit APIC-Stock Options), and credits Common Stock at par and APIC for the total consideration. No additional compensation expense is recognized at exercise - all expense was recognized over the vesting period. Answer B is correct. Answer A records compensation at exercise date, which violates ASC 718's grant-date measurement principle. Answer C records a gain, but option exercises are equity transactions with no income statement effect on the issuer. Answer D credits Retained Earnings, which is incorrect.

Question 4

1. Incremental compensation cost is recognized, equal to the excess of the modified award's fair value over the original award's fair value on the modification date. (correct answer)
2. The original compensation cost is reversed and the full fair value of the modified award is recognized from the modification date.
3. No additional cost is recognized because the total shares granted have not changed.
4. The modification is recognized as a gain by the employee and a loss by the company.

Explanation: Under ASC 718, a modification is accounted for by comparing the fair value of the modified award to the fair value of the original award immediately before modification. Any excess (incremental fair value) is recognized as additional compensation cost over the remaining requisite service period. Previously recognized compensation is not reversed. Answer A is correct. Answer B reverses prior expense and starts over, which overstates cost. Answer C ignores the incremental fair value from the repricing. Answer D records a company loss, treating an equity transaction as an income statement item.

Question 5

1. Deferred until the performance target is confirmed at the end of the performance period.
2. Recognized in full on the grant date since the fair value is determinable.
3. Recognized only if the earnings target is achieved; no expense if the target is missed.
4. Recognized over the service period based on the probability-weighted outcome, adjusted as probability assessments change. (correct answer)

Explanation: Under ASC 718, compensation cost for performance-based awards is recognized over the requisite service period based on the probable outcome of the performance condition. If achievement is probable, expense accrues over the service period. If the probability assessment changes, the cumulative expense is adjusted in the period of change. Answer D is correct. Answer A defers all recognition until the target is confirmed, ignoring accrual accounting. Answer B recognizes immediately at grant regardless of service. Answer C is an all-or-nothing approach that does not reflect the probability-based model required by ASC 718.

Question 6

1. Book value per share on the grant date.
2. Market value of comparable public companies.
3. Historical cost per share.
4. Calculated value using a simplified volatility assumption based on an appropriate index. (correct answer)

Explanation: ASC 718 provides a practical expedient for nonpublic entities that cannot estimate expected volatility. Such companies may use a 'calculated value' method that substitutes the volatility of an appropriate industry sector index for the entity's own expected volatility. Answer D is correct. Book value per share (A) is an accounting measure, not a fair value substitute. Comparable public company market values (B) are used in valuation contexts but are not the specific ASC 718 practical expedient. Historical cost (C) has no role in fair value measurement.

Question 7

1. Three-quarters of total grant-date fair value is recognized in Year 3.
2. No compensation expense is recognized in any period since vesting is not probable.
3. Compensation expense continues to be recognized without adjustment until vesting is confirmed.
4. All previously recognized compensation expense is reversed to zero in the period the service condition is determined to be no longer probable of being met. (correct answer)

Explanation: Under ASC 718, when it is determined that a service condition will not be met, all previously recognized compensation expense for that award is reversed in the period of that determination. The cumulative compensation cost is reduced to zero because no benefit is ultimately received - the employee will not vest. Answer D is correct. Answer A recognizes three-quarters of the cost as if partial vesting occurs, but cliff-vesting awards confer no partial benefit if the employee leaves before the vesting date. Answer B correctly arrives at zero cumulative expense but implies expense was never appropriately recognized in prior periods, which is incorrect - prior recognition was appropriate and is reversed in the current period. Answer C ignores the required reassessment and continues expense accrual despite the changed probability determination.

Question 8

1. Compensation expense previously recognized is reversed upon expiration.
2. A gain equal to the exercise price of the unexercised options is recognized.
3. APIC is reduced and Retained Earnings is increased for the expired options.
4. No adjustment to compensation expense; the APIC balance from the options remains in equity. (correct answer)

Explanation: When vested options expire unexercised, compensation expense is not reversed - the employee rendered the service and the compensation has been appropriately recognized. The APIC-Stock Options balance associated with the expired options remains in stockholders' equity; it is typically reclassified from APIC-Stock Options to APIC-Other or left as is. No income statement impact occurs. Answer D is correct. Answer A reverses expense after vesting, which is not permitted. Answer B records a gain, treating an equity transaction as income. Answer C reduces APIC without increasing Retained Earnings - the entire APIC balance is retained in equity.

Question 9

1. $60,000
2. $56,000
3. $55,000 (correct answer)
4. $45,000

Explanation: Year 1 expense (all 6,000 options): 6,000 x $15 / 3 =$30,000. At end of Year 2, 500 options forfeited: reverse Year 1 expense for those options: 500 x $15 / 3 =$2,500. Year 2 expense for remaining 5,500 options: 5,500 x $15 / 3 =$27,500. Net Year 2 expense = $27,500 -$2,500 = $25,000. Cumulative through Year 2 =$30,000 + $25,000 =$55,000. Alternatively: 5,500 options x $15 x (2/3) =$55,000. Answer C is correct. Answer A ignores forfeitures entirely. Answer B subtracts only one year of forfeited expense. Answer D recognizes only Year 2 expense.

Question 10

1. $108,000
2. $27,000
3. $48,000
4. $36,000 (correct answer)

Explanation: Total compensation = 9,000 x $12 =$108,000. Under straight-line attribution over 3 years: $108,000 / 3 =$36,000 per year. Year 2 expense = $36,000. Answer D is correct. Answer A is the total grant-date fair value recognized immediately. Answer B applies$12 to one-third of the options for half a year. Answer C would result from applying a non-standard attribution period.

Question 11

1. $20,000 (correct answer)
2. $80,000
3. $8,000
4. $32,000

Explanation: Total compensation cost = 10,000 options x $8 =$80,000. With ratable (straight-line) vesting over 4 years, annual expense = $80,000 / 4 =$20,000. Answer A is correct. Answer B recognizes the full grant-date fair value immediately. Answer C uses only $1 per option per year rather than$8/4. Answer D applies the full $8 per option to one-quarter of the options rather than spreading the cost evenly.

Question 12

1. $7 per option - the grant-date fair value. (correct answer)
2. $0 - because the intrinsic value at grant is zero.
3. $25 per option - the exercise price.
4. $25 per option - the market price at grant.

Explanation: Under ASC 718, compensation cost for equity-classified options is based on grant-date fair value as determined by an option pricing model (such as Black-Scholes or a binomial model), regardless of intrinsic value. Even if the option is at-the-money (exercise price equals market price, intrinsic value = $0), the time value component makes the fair value positive. Answer A is correct. Answer B uses intrinsic value, which is the old APB 25 approach replaced by ASC 718. Answers C and D use the exercise price or market price rather than modeled fair value.

Question 13

1. Tax benefits are recorded as a reduction of compensation expense.
2. Excess tax benefits (windfalls) are recognized in income tax expense within the income statement. (correct answer)
3. Tax deficiencies are charged to Additional Paid-In Capital.
4. All tax effects of stock compensation are deferred until options are exercised.

Explanation: Under ASU 2016-09 (now codified in ASC 718), all excess tax benefits and tax deficiencies related to stock-based compensation are recognized in income tax expense in the income statement. This includes both windfalls (when the tax deduction exceeds book expense) and shortfalls (when the deduction is less than book expense). Answer B is correct. Answer A nets tax benefits against compensation expense rather than recording them in the tax provision. Answer C was the pre-ASU 2016-09 treatment for deficiencies. Answer D defers all tax effects, which is inconsistent with ASC 718 and ASC 740.

Question 14

1. The option's expected intrinsic value at the anticipated exercise date.
2. Both the intrinsic value component and the time value component of the option. (correct answer)
3. Only the time value component, since intrinsic value at grant is typically zero for at-the-money options.
4. The difference between the stock's book value and its market price.

Explanation: The fair value of a stock option has two components: intrinsic value (excess of current market price over exercise price) and time value (the value of the right to wait before exercising). Grant-date fair value as measured by option pricing models captures both components. Answer B is correct. Answer A uses only expected intrinsic value at exercise, ignoring time value. Answer C includes only time value, ignoring intrinsic value. Answer D introduces book value, which is not an option pricing concept.

Question 15

1. Nonemployee awards are measured at grant-date fair value, consistent with employee award accounting. (correct answer)
2. Nonemployee awards are measured at fair value on each reporting date until vesting.
3. Nonemployee awards are expensed at the intrinsic value on the date services are completed.
4. Nonemployee awards are always classified as liabilities.

Explanation: ASU 2018-07 aligned the accounting for nonemployee share-based payment awards with employee award accounting. Nonemployee equity-classified awards are now measured at grant-date fair value and recognized over the service period, consistent with employee awards. Answer A is correct. Answer B describes the pre-ASU 2018-07 treatment, which required remeasurement through vesting. Answer C uses intrinsic value, which is inconsistent with ASC 718's fair value model. Answer D is incorrect; nonemployee awards follow the same equity vs. liability classification principles as employee awards.

Question 16

1. The requisite service period is the longer of the explicit service period and the period over which the performance condition is expected to be achieved. (correct answer)
2. The requisite service period is always equal to the performance period.
3. The requisite service period is the shorter of the service period and the performance period.
4. There is no requisite service period when a performance condition exists.

Explanation: Under ASC 718, when an award has both explicit service and performance conditions, the requisite service period is the longer of the explicit service period and the period over which the performance condition is expected to be achieved. This ensures compensation is recognized over the full period during which the employee must provide service to earn the award. Answer A is correct. Answer B equates the service period to the performance period only. Answer C uses the shorter period, which would accelerate expense recognition inappropriately. Answer D is incorrect; performance conditions do not eliminate the concept of a requisite service period.

Question 17

1. Intrinsic value on the exercise date.
2. Fair value on the exercise date.
3. Fair value on the grant date. (correct answer)
4. Intrinsic value on the grant date.

Explanation: Under ASC 718, equity-classified employee stock options are measured at fair value on the grant date. This amount is recognized as compensation expense over the requisite service period (typically the vesting period). Answer C is correct. Intrinsic value (A, D) is only used in limited circumstances for liability-classified awards or as a practical expedient for nonpublic entities. Fair value on the exercise date (B) is not the measurement date for equity-classified awards.

Question 18

1. Recognized entirely on the vesting date at the stock's fair value on that date.
2. Recognized on the grant date for the full fair value of the shares.
3. Recognized only when the shares are actually delivered to the employee.
4. Recognized ratably over the 3-year service period based on grant-date fair value. (correct answer)

Explanation: Under ASC 718, RSUs are equity-classified awards measured at grant-date fair value and expensed over the requisite service period (the vesting period). For cliff-vesting RSUs, the expense is recognized on a straight-line basis over the 3-year service period. Answer D is correct. Answer A uses the vesting date fair value and delays recognition. Answer B recognizes everything immediately at grant. Answer C delays recognition until delivery, which is after the service has been performed.

Question 19

1. The employee's marginal income tax rate.
2. The company's book value per share.
3. Expected stock price volatility. (correct answer)
4. The option's intrinsic value at grant date.

Explanation: The Black-Scholes and similar option pricing models require: current stock price, exercise price, expected term, risk-free interest rate, expected dividends, and expected volatility. Expected stock price volatility (Answer C) is a required input that measures the expected fluctuation of the underlying stock price over the option's expected term. Answer A (employee tax rate) is irrelevant to fair value measurement. Answer B (book value per share) is an accounting metric, not an option pricing input. Answer D (intrinsic value) is an output of the model's components, not a separate input.

Question 20

1. The names of all employees who received stock-based awards.
2. The weighted-average grant-date fair value of options granted during the period. (correct answer)
3. The specific option pricing model inputs used for each individual grant.
4. The projected future compensation expense for each employee.

Explanation: ASC 718 requires disclosure of the weighted-average grant-date fair value of options and similar instruments granted during the period, along with the method and significant assumptions used to estimate fair value. Answer B is correct. Individual employee names (A) are not disclosed. Per-grant model inputs (C) are reported in aggregate or weighted-average form, not individually. Projected future expense by employee (D) is not required - only aggregate unrecognized compensation cost and expected recognition period.