CPA Quiz: Account For Stock Based Compensation
20 questions · exam conditions
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Account For Stock Based CompensationQuestion 1 of 20

Under ASC 718, stock appreciation rights (SARs) that will be settled in cash are classified as:

Equity awards, measured at grant-date fair value.
Equity awards, remeasured each reporting period.
Liability awards, remeasured at fair value each reporting period until settlement.
Liability awards, measured at intrinsic value on the settlement date only.
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CPA Quiz

CPA Quiz: Account For Stock Based Compensation

Practice Account For Stock Based Compensation in CPA with focused quiz questions that help you check what you know, review explanations, and build confidence with test-style prompts.

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.

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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.

All questions

Question 1

Under ASC 718, stock appreciation rights (SARs) that will be settled in cash are classified as:

  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 2

A company grants performance-based restricted stock units that vest only if the company achieves a specific earnings target. The target is considered probable of achievement. How should compensation expense be recognized?

  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 3

A nonpublic company grants stock options and elects the practical expedient allowed under ASC 718. Which measurement basis may the nonpublic company use instead of a fair value option pricing model?

  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 4

A company grants stock options with a 4-year cliff vesting schedule. At the end of Year 3, the company determines that it is no longer probable that the employees will complete the required service period. What is the cumulative effect on compensation expense through Year 3?

  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 5

A company grants 6,000 options on January 1, Year 1 with a grant-date fair value of $15 each, vesting cliff at the end of Year 3. At the end of Year 2, 500 options are forfeited. Accounting for forfeitures as they occur, what is the cumulative compensation expense through December 31, Year 2?

  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 6

A company grants 9,000 stock options on January 1, Year 1 with a grant-date fair value of $12 each, vesting in equal annual installments over 3 years. Using straight-line attribution, what is compensation expense in Year 2?

  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 7

A company grants stock options with an exercise price of $25 per share when the market price is $25. The grant-date fair value using an option pricing model is $7 per option. What amount is used as the basis for compensation expense under ASC 718?

  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 8

Under ASC 718, which of the following correctly describes the treatment of tax benefits related to stock-based compensation?

  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 9

Under ASC 718, which of the following is included in the grant-date fair value measurement of a stock option?

  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 10

Which of the following correctly describes the accounting for stock-based compensation awards granted to nonemployees under ASC 718 (as amended by ASU 2018-07)?

  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 11

Under ASC 718, stock options granted to employees are measured at which value on which date?

  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 12

A company grants restricted stock units (RSUs) to an employee. The RSUs vest after 3 years of service and will be settled in shares. How should the compensation cost be recognized?

  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 13

A company has recognized $200,000 of cumulative compensation expense for a stock option award over the vesting period. When the employees exercise their options, the total tax deduction allowed is $240,000. Using a 21% tax rate, how is the total income tax effect at exercise recognized under ASU 2016-09?

  1. $42,000 tax benefit; excess $8,400 credited to APIC.
  2. $50,400 tax benefit recognized in income tax expense; excess benefit of $8,400 flows through the income statement. (correct answer)
  3. $42,000 tax benefit recognized; excess $8,400 deferred until the options expire or are forfeited.
  4. $50,400 tax benefit; $8,400 excess deferred until options vest.
Explanation: At exercise, the actual tax deduction ($240,000 x 21% = 50,400)exceedsthedeferredtaxassetpreviouslyestablishedforcumulativebookcompensationexpense(50,400) exceeds the deferred tax asset previously established for cumulative book compensation expense (200,000 x 21% = $42,000). Under ASU 2016-09, the full $50,400 tax benefit is recognized at exercise: the $42,000 reversal of the deferred tax asset, plus the $8,400 excess tax benefit (windfall) recognized immediately in income tax expense in the income statement. Answer B is correct. Answer A credits the excess $8,400 to APIC, which was the pre-ASU 2016-09 treatment and is no longer permitted. Answer C defers the excess until expiration or forfeiture, which is inconsistent with ASU 2016-09's requirement to recognize windfalls immediately in the income statement. Answer D defers the excess until vesting, but vesting has already occurred at the point of exercise.

Question 14

On January 1, Year 1, a company grants 5,000 options with a grant-date fair value of $12 each, vesting cliff at the end of Year 3. At the end of Year 2, the company determines that all options will vest. What cumulative compensation expense should be recognized through December 31, Year 2?

  1. $60,000
  2. $20,000
  3. $30,000
  4. $40,000 (correct answer)
Explanation: Total compensation = 5,000 x $12 = $60,000. Recognized straight-line over 3 years: $20,000 per year. Through December 31, Year 2 (2 years elapsed): $20,000 x 2 = $40,000. Answer D is correct. Answer A recognizes the full $60,000 prematurely. Answer B is only Year 1 expense. Answer C would be correct for Year 1 and half of Year 2, not the full two-year cumulative amount.

Question 15

A company issues 1,000 shares of restricted stock (not RSUs) to an employee when the market price is $30 per share. The shares vest in 2 years. Under ASC 718, what amount is recorded as unearned compensation at grant?

  1. $0; compensation is recognized only when the shares vest.
  2. $60,000 in compensation expense immediately.
  3. $30,000 debit to Unearned Compensation (contra-equity) and $30,000 credit to Common Stock and APIC. (correct answer)
  4. $30,000 debit to Prepaid Compensation (asset) and $30,000 credit to Common Stock and APIC.
Explanation: Under ASC 718 for restricted stock awards (not RSUs), the grant is recorded by debiting Unearned Compensation (a contra-equity account) and crediting Common Stock and APIC at the grant-date fair value: 1,000 x $30 = $30,000. The unearned compensation is then amortized to expense over the 2-year vesting period. Answer C is correct. Answer A defers all recognition incorrectly. Answer B recognizes the full amount immediately. Answer D records it as an asset (Prepaid Compensation), which is not the correct ASC 718 presentation - the debit is to contra-equity, not an asset.

Question 16

A company grants 10,000 stock options on January 1, Year 1. Each option has a grant-date fair value of $8. The options vest ratably over 4 years. What is the compensation expense recognized in Year 1?

  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 17

Alpha Corp granted performance share units (PSUs) to executives on January 1, 2024. The number of shares that will vest depends on achieving specific revenue targets over a three-year period. At grant date, management estimated a 70% probability of achieving the target, which would result in 8,000 shares vesting. The grant-date fair value was $25 per share. At December 31, 2024, management revised the probability estimate to 90% based on strong performance.

What amount should Alpha record as stock-based compensation expense for the year ended December 31, 2024?

  1. $46,667
  2. $60,000 (correct answer)
  3. $50,000
  4. $66,667
Explanation: For performance-based awards, compensation expense is based on the probable outcome. Initially, expected shares to vest = 8,000 × 70% = 5,600 shares. Total expected compensation = 5,600 × $25 = $140,000 over 3 years. By December 31, 2024, the probability increased to 90%, so expected shares = 8,000 × 90% = 7,200 shares. Revised total compensation = 7,200 × $25 = $180,000. The cumulative expense through December 31, 2024 (end of year 1) should be $180,000 × 1/3 = $60,000. Since this is the first year, the 2024 expense equals the cumulative expense of 60,000.ChoiceA(60,000. Choice A (46,667) would be 1/3 of the original estimate (140,000÷3).ChoiceC(140,000 ÷ 3). Choice C (50,000) doesn't correspond to any logical calculation. Choice D ($66,667) might represent an incorrect calculation mixing the probabilities.

Question 18

Theta Inc. has an employee stock ownership plan (ESOP) and made the following transactions during 2024: (1) The ESOP borrowed $1,000,000 from the company to purchase 25,000 shares of Theta stock at $40 per share. (2) The company made cash contributions of $150,000 to the ESOP during the year. (3) The ESOP used $120,000 to repay the loan principal and $30,000 for interest. (4) The ESOP allocated 3,000 shares to employee accounts based on the loan repayment.

What amount should Theta record as compensation expense related to the ESOP for 2024?

  1. $120,000 (correct answer)
  2. $150,000
  3. $180,000
  4. $30,000
Explanation: For leveraged ESOPs, compensation expense equals the fair value of shares allocated to employee accounts during the period. The ESOP allocated 3,000 shares, and these should be valued at fair value when allocated. Since the shares were purchased at $40 and there's no indication of a different fair value, the compensation expense = 3,000 shares × $40 = 120,000.Thismatchestheloanprincipalrepaymentamount,whichisnotcoincidental−sharesaretypicallyallocatedbasedontheproportionofloanprincipalrepaid.ChoiceB(120,000. This matches the loan principal repayment amount, which is not coincidental - shares are typically allocated based on the proportion of loan principal repaid. Choice B (150,000) represents the total cash contribution but not all of it results in share allocation. Choice C (180,000)incorrectlyaddsinterestexpensetocompensationexpense.ChoiceD(180,000) incorrectly adds interest expense to compensation expense. Choice D (30,000) represents only the interest portion, which is recorded as interest expense, not compensation expense.

Question 19

Kappa Inc. granted cash-settled stock appreciation rights (SARs) with the following terms: 5,000 SARs granted on January 1, 2024, with a $25 base price and three-year cliff vesting. The stock prices were $30 on December 31, 2024, and $35 on December 31, 2025. What is the compensation expense Kappa should recognize for 2025?

  1. $25,000 (correct answer)
  2. $16,667
  3. $8,333
  4. $33,333
Explanation: Cash-settled SARs are liability awards remeasured at each reporting date. At December 31, 2024, the liability was ($30 - $25) × 5,000 × 1/3 = 8,333(representing1yearof3−yearcliffvesting).AtDecember31,2025,theliabilityshouldbe(8,333 (representing 1 year of 3-year cliff vesting). At December 31, 2025, the liability should be (35 - $25) × 5,000 × 2/3 = $33,333 (representing 2 years of 3-year cliff vesting). Therefore, 2025 compensation expense = $33,333 - $8,333 = $25,000.

Question 20

Lambda Corporation granted 20,000 stock options to employees on June 1, 2023. The options have a four-year vesting period and were valued at $5 per option at grant date. On December 31, 2024, Lambda determined that 2,000 options will be forfeited due to employee turnover. Previously, the company estimated that 1,500 options would be forfeited.

What adjustment to compensation expense should Lambda make for the year ended December 31, 2024, due to the change in forfeiture estimate?

  1. $625 decrease
  2. $2,500 decrease
  3. $1,250 decrease
  4. $781 decrease (correct answer)
Explanation: Original estimate: 18,500 options expected to vest (20,000 - 1,500). Revised estimate: 18,000 options expected to vest (20,000 - 2,000). The change is 500 fewer options expected to vest. From June 1, 2023 to December 31, 2024 = 19 months. Under the revised estimate, cumulative expense should be: 18,000 options × $5 × 19/48 months = $35,625. Under the original estimate that would have been previously recorded: 18,500 options × $5 × 19/48 = $36,406. The required adjustment = $35,625 - 36,406=−36,406 = -781 decrease.