chapter 8
DESCRIPTION
Stockholders’ Equity. Chapter 8. Learning Objectives. Account for the issuance of capital stock. Describe a compensatory stock option plan. Account for share appreciation rights . Describe the characteristics of preferred stock. Know the components of contributed capital . - PowerPoint PPT PresentationTRANSCRIPT
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Chapter 8
Stockholders’ EquityStockholders’ Equity
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1. Account for the issuance of capital stock.2. Describe a compensatory stock option plan.3. Account for share appreciation rights.4. Describe the characteristics of preferred stock.5. Know the components of contributed capital.6. Understand the accounting for treasury stock.7. Recognize compensation expense for a
compensatory stock option plan using the fair value method. Account for a fixed compensatory stock option plan.
8. Account for a performance-based compensatory stock option plan.
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Represents the owners’ residual interest in total assets after liabilities are recognized.
Difference between the assets and the liabilities of a company.
Is sometimes referred to as net assets.
Owners’or Stockholders’EquityOwners’or Stockholders’Equity
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State laws dictate the incorporation process. Articles of incorporation are filed with the state.
-- Specify the purpose of the business, its location, classes and number of shares of capital stock authorized, etc.
The state issues a corporate charter. A board of directors is selected.
Formation of a CorporationFormation of a Corporation
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Public corporations-- Government-owned: FDIC, TVA
Private corporations-- Nonstock corporations
Nonprofit organizations that do not issue stock: churches, colleges, charities
-- Stock corporations Closed corporations: few stockholders Open corporations: publicly traded
Classifications of CorporationsClassifications of Corporations
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Ownership of common stock usually entitles the holder to the . . . ◦ Right to vote.◦ Right to participate in earnings through declared
dividends.◦ Right to participate in distribution of assets at
liquidation.◦ Right to retain percentage of ownership in the
corporation when new shares are issued (preemptive right).
Characteristics of Capital StockCharacteristics of Capital Stock
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Corporations are a separate legal entity.
Issues of stock are recorded in conformity with the cost principle.
Sales and repurchases of shares do not affect periodic net income.
Stockholders’equity is separated from debt of the entity.
Concepts and DefinitionsConcepts and Definitions
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Categories of equity-- Contributed capital (Paid-in capital)
Capital Stock: Preferred and Common Additional paid-in capital
-- Retained earnings Unappropriated and appropriated
-- Unrealized capital Increases or decreases in equity that do
not result from stock transactions or from the retention of retained earnings.
Concepts and DefinitionsConcepts and Definitions
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Classification of capital stock◦ Authorized◦ Issued◦ Unissued◦ Treasury stock◦ Outstanding◦ Subscribed
Concepts and DefinitionsConcepts and Definitions
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AuthorizedShares
The maximum number of shares of capital
stock that can be sold to the public is called
the authorized number of shares.
Authorized, Issued, and Outstanding Capital Authorized, Issued, and Outstanding Capital StockStock
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AuthorizedShares Issued
shares are authorized shares of stock that have been
sold.
Unissued shares are authorized shares of stock that have never been sold.
Authorized, Issued, and Outstanding Capital Authorized, Issued, and Outstanding Capital StockStock
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AuthorizedShares
UnissuedShares
TreasuryShares
OutstandingShares
Treasury shares are issued shares that have been reacquired by the
corporation.
IssuedShares
Outstanding shares are issued shares that are owned
by stockholders.
Authorized, Issued, and Outstanding Capital Authorized, Issued, and Outstanding Capital StockStock
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Advantages-- Limited liability-- Capital accumulation-- Ease of ownership transfer
Disadvantages-- Increased taxation-- Difficulties of control-- Regulation
CorporationsCorporations
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Par value stock-- Designated dollar amount per share stated in the
corporate charter.-- No relationship to market value.
Nopar stock-- Dollar amount per share not designated in
corporate charter.-- Corporations can assign a stated value per share
(treated as if par value).
Features of Equity SecuritiesFeatures of Equity Securities
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Legal capital is . . .-- That portion of stockholders’equity that must be
contributed to the firm at the issuance of stock.-- The amount of capital, required by state law, that
must remain invested in the business. -- Refers to par value, stated value, or full amount
paid for nopar stock.
Features of Equity SecuritiesFeatures of Equity Securities
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Common stock . . .-- Is the basic voting stock of the corporation.-- Ranks after preferred stock for dividend and
liquidation distribution.-- Has dividend rates determined by the board of
directors based on the corporation’s profitability.
Features of Equity SecuritiesFeatures of Equity Securities
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Preferred stock . . .-- Has dividend and liquidation preference over
common stock.-- Generally does not have voting rights.-- Usually has a par or stated value.-- May be convertible, callable, and/or redeemable.
Features of Equity SecuritiesFeatures of Equity Securities
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Preferred stock dividends . . . -- Are usually stated as a percentage of the par
or stated value.-- May be cumulative or noncumulative.-- May be partially participating, fully
participating, or nonparticipating.
Features of Equity SecuritiesFeatures of Equity Securities
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Provides that dividends not declared in previous years accumulate and must be paid in full when dividends are declared in later years before dividends can be paid on common stock.
Dividends in arrears are not liabilities until declared. However, the per share and aggregate amounts must be disclosed.
Preferred StockPreferred StockCumulative DividendsCumulative Dividends
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Kites, Inc. has the following stock outstanding: Common, $1 par value, 100,000 shares Preferred, 3%, $100 par value, cumulative, 5,000 shares Preferred, 6%, $50 par value, noncumulative, 3,000 shares
Dividends were paid every year except for the prior year. In the current year the board of directors declares dividends of $50,000.
How much in dividends does each class of stock receive?
Preferred StockPreferred Stock Example Example
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Preferred stock (cumulative)Arrearage ($100 par ×3% ×5,000 shares) 15,000$ Current Yr. ($100 par ×3% ×5,000 shares) 15,000 30,000$
Preferred StockPreferred Stock Example Example
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Preferred stock (cumulative)Arrearage ($100 par ×3% ×5,000 shares) 15,000$ Current Yr. ($100 par ×3% ×5,000 shares) 15,000 30,000$
Preferred stock (noncumulative)Current Yr. ($50 par ×6% ×3,000 shares) 9,000
Preferred StockPreferred Stock Example Example
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Preferred stock (cumulative)Arrearage ($100 par ×3% ×5,000 shares) 15,000$ Current Yr. ($100 par ×3% ×5,000 shares) 15,000 30,000$
Preferred stock (noncumulative)Current Yr. ($50 par ×6% ×3,000 shares) 9,000
Common stockCurrent Yr. ($50,000 dividend - $39,000 to preferred) 11,000
Total dividend declared 50,000$
Preferred StockPreferred Stock Example Example
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NonparticipatingLimits the yearly dividends to the specified rate
plus any arrearage for cumulative stock.
Partially participatingAllows dividends above the specified rate on a pro rata basis with common stock up to a limit specified in the corporate charter.
Preferred StockPreferred Stock Participating Preferences Participating Preferences
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Fully participating Allows dividends above the specified rate on a pro rata basis with common stock without any limits.
Preferred StockPreferred Stock Participating Preferences Participating Preferences
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Kites, Inc. has the following stock outstanding:Common, $1 par value, 100,000 sharesPreferred, 3%, $100 par value, noncumulative, 5,000 shares
Dividends were paid every year except for the prior year. The preferred is partially participating up to 5%. In the current year the board of directors declares dividends of $60,000. How much in dividends does each class of stock receive?
Preferred StockPreferred Stock Example Example
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Preferred Common TotalPreferred stock (noncumulative) ($100 par ×3% ×5,000 shares) 15,000$ 15,000$ Common stock (3% matching) ($1 par ×100,000 shares = $100,000 ×3%) 3,000$ 18,000
Preferred StockPreferred Stock Example Example
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Preferred Common TotalPreferred stock (noncumulative) ($100 par ×3% ×5,000 shares) 15,000$ 15,000$ Common stock (3% matching) ($1 par ×100,000 shares = $100,000 ×3%) 3,000$ 18,000 Preferred stock (participating 2%) ($100 par ×2% ×5,000 shares) 10,000 28,000 Common stock (2% matching) ($100,000 ×2%) 2,000 30,000
Preferred StockPreferred Stock Example Example
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Preferred Common TotalPreferred stock (noncumulative) ($100 par ×3% ×5,000 shares) 15,000$ 15,000$ Common stock (3% matching) ($1 par ×100,000 shares = $100,000 ×3%) 3,000$ 18,000 Preferred stock (participating 2%) ($100 par ×2% ×5,000 shares) 10,000 28,000 Common stock (2% matching) ($100,000 ×2%) 2,000 30,000 Common stock (remainder) ($60,000 - $30,000) 30,000 60,000
Total dividend declared 25,000$ 35,000$
Preferred StockPreferred Stock Example Example
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Par value stock: Cash (DEBIT)
Common Stock, par value (CREDIT) Additional Paid-in Capital, Common Stock (CREDIT)
In this entry, Common Stock is credited for the par value of the stock issued. The excess over par is credited to the Contributed Capital in Excess of Par account.
Issuing Stock for CashIssuing Stock for Cash
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Nopar stock: Cash (DEBIT) Common Stock (CREDIT)
Stated value stock: Cash (DEBIT) Common Stock, stated value (CREDIT) Additional Paid-in Capital, Common Stock (CREDIT) In this entry, Common Stock is credited for the stated
value of the stock issued. The excess over stated value is credited to the Contributed Capital in Excess of Stated Value account.
Issuing Stock for CashIssuing Stock for Cash
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A corporation enters into a subscription contract with several subscribers that calls for the purchase of 1,000 shares of $6 par common stock at a price of $13 per share. A $3 per share down payment is required, with the remaining $10 due in one month.
Cash 3,000Subscription Receivable: Common Stock 10,000
Common Stock Subscribed 6,000Additional Paid-in Capital on Common Stock 7,000
$6 $6 x 1,000x 1,000
Stock SubscriptionsStock Subscriptions
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The $10 per share final payment was received from subscribers to 950 of the 1,000 shares.
Cash 9,500Subscription Receivable: Common Stock 9,500
Common Stock Subscribed 5,700Common Stock, $6 par 5,700
950 950 x $6x $6
Stock SubscriptionsStock Subscriptions
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1. Return to the subscriber the entire amount paid in.
2. Return to the subscriber the entire amount paid in, less any costs incurred to reissue the stock.
3. Issue to the subscriber a lesser number of shares based upon the total amount of payment received.
4. Require the forfeiture of all amounts paid in.
When a default occurs, the accounting is determined by the relevant contract provisions, such as--
Stock SubscriptionsStock Subscriptions
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The subscriber to the 50 remaining shares defaults on the contract. The contract requires the forfeiture of all amounts paid in.
Common Stock Subscribed 300Additional Paid-in Capital on Common Stock 350
Subscription Receivable: Common Stock 500Additional Paid-in Capital from
Subscription Default 150
50 50 X $7X $7
50 50 X $6X $6
50 50 X $10X $10
Stock SubscriptionsStock Subscriptions
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Use the current market value of the stock issued or the noncash consideration received, whichever is most reliably determinable.
If market values cannot be determined, use appraised values.
Issuing StockIssuing Stockfor Noncash Assetsfor Noncash Assets
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Total proceeds must be allocated among the classes of stock issued:◦ Proportional method
Allocate the lump-sum received among the classes of stock issued based on their relative market values.
◦ Incremental method Allocate a portion of the lump-sum received to one
security based on that security’s market value and allocate the remainder to the other security.
Combined Sales of Stock Combined Sales of Stock
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Common Stock: $16 x 2 shares x 100 = $ 3,200Preferred Stock: $60 x 1 share x 100 = 6,000 Total market value $9,200
A corporation issues 100 packages of securities for $82.80 per package. Each package consists of two shares of $10 par common stock (market value, $16 per share) and one share of $50 par preferred stock (market value, $60 per share).
Combined Sales of StockCombined Sales of StockExample Example
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A corporation issues 100 packages of securities for $82.80 per package. Each package consists of two shares of $10 par common stock (market value, $16 per share) and one share of $50 par preferred stock (market value, $60 per share).
Common Stock: x $8,280 = $2,880$3,200$9,200
Preferred Stock: x $8,280 = 5,400$6,000$9,200
$8,280
Combined Sales of StockCombined Sales of StockExample Example
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A corporation issues 100 packages of securities for $82.80 per package. Each package consists of two shares of $10 par common stock (market value, $16 per share) and one share of $50 par preferred stock (market value, $60 per share).
Cash 8,280Common Stock 2,000Additional Paid-in Capital on Com. Stock 880Preferred Stock, $50 par 5,000Additional Paid-in Capital on Pref. Stock 400
Combined Sales of StockCombined Sales of StockExample Example
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Costs incurred to issue stock◦ Registration fees◦ Underwriter commissions◦ Attorney and accountant fees◦ Printing costs◦ Clerical costs◦ Promotional costs
Stock Issue CostsStock Issue Costs
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Two methods of accounting for stock issue costs:Offset method
Debit costs to Contributed Capital in Excess of Par.Deferred charge method
Debit an intangible asset and amortize over a reasonable
period.
Stock Issue CostsStock Issue Costs
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The FASB is planning to change GAAP so that all stock issuance costs are expensed as incurred.
Stock Issuance CostsStock Issuance Costs
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Represents an increase or decrease in stockholders’equity not arising from earnings, dividend payments, or a change in contributed capital. Examples include:◦ Unrealized holding gains and losses on available for sale
securities.◦ Gains and losses resulting from translating foreign-
denominated financial statements into US currency.◦ Guarantees of ESOP debt.◦ Pension liability adjustments.
Unrealized CapitalUnrealized Capital
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Any questions?
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Repurchased shares of a corporation’s own stockThe shares are retired or used to:
Issue in employee stock option programs. Establish a market for the company’s stock. Purchase assets. Issue as a stock dividend. Increase earnings per share. Reduce ownership. Thwart takeover attempts. Reduce dividend payments.
Treasury StockTreasury Stock
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Usually does not have:-- Voting rights-- Dividends rights-- Preemptive rights-- Liquidation rights
Reduces both assets and stockholders’ equity Is classified as a contra account to stockholders’
equity
Treasury StockTreasury StockCharacteristicsCharacteristics
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Cost method(one-transaction concept)
Par value method(dual-transaction concept)
Treasury StockTreasury StockRecording and ReportingRecording and Reporting
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The purchase and subsequent sale of treasury stock are viewed as one transaction with two parts.
Treasury StockTreasury StockCost MethodCost Method
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Acquisition of Treasury Stock-- Recorded at cost to acquire.
Treasury Stock (DEBIT) Cash (CREDIT)
Issuance of Treasury Stock-- Treasury Stock credited for cost.-- Difference between cost and issuance price is
(generally) recorded in Additional Paid-in Capital-Treasury Stock.
Treasury StockTreasury StockCost MethodCost Method
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Cost MethodCost Method
Ball issues 6,000 shares of $10 par common stock for $12 per share:
Cash 72,000Common Stock $10 par 60,000Additional Paid-in Capital on Common Stock 12,000
Treasury StockTreasury Stock
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Cost MethodCost Method
Reacquisition of 1,000 shares of common stock at $13 per share:
Treasury Stock 13,000Cash 13,000
Treasury StockTreasury Stock
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Cost MethodCost Method
Reissuance of 600 shares of treasury stock at $15 per share:
Cash 9,000Treasury Stock 7,800Additional Paid-in Capital from Treasury Stock 1,200
Treasury StockTreasury Stock
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Cost MethodCost Method
Reissuance of another 200 shares of treasury stock at $8 per share:
Cash 1,600Additional Paid-in Capital from Treasury Stock 1,000
Treasury Stock 2,600
Treasury StockTreasury Stock
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Cost MethodCost Method
Reissuance of another 100 shares of treasury stock at Reissuance of another 100 shares of treasury stock at $10 per share:$10 per share:
Cash 1,000Additional Paid-in Capital from Treasury Stock 200Retained Earnings 100
Treasury Stock 1,300
Treasury StockTreasury Stock
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Date of acquisition◦ Debit Treasury Stock for the par value, stated value, or
average amount previously credited to the capital stock account for nopar stock.
◦ Debit Additional Paid-in Capital for the proportionate amount of any excess over par or stated value that was paid by stockholders when the shares were originally issued.
◦ Debit or credit Additional Paid-in Capital from Treasury Stock as required. -- Debit cannot exceed the credit balance in the account.
Any excess is debited to Retained Earnings.◦ Credit Cash.
Treasury StockTreasury StockPar Value MethodPar Value Method
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Date of resale◦ Debit Cash.◦ Credit Treasury Stock for the par value, stated
value, or average amount previously credited to the capital stock account for nopar stock.
◦ Credit Additional Paid-in Capital fromTreasury Stock or debit Additional Paid-in Capital from Treasury Stock (and Retained Earnings, if necessary).
Treasury StockTreasury StockPar Value MethodPar Value Method
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Par Value MethodPar Value Method
Issuance of 6,000 shares of $10 par common stock for $12 per share:
Cash 72,000Common Stock $10 par 60,000Additional Paid-in Capital on Common Stock 12,000
Treasury StockTreasury Stock
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Par Value MethodPar Value Method
Reacquisition of 1,000 shares of common stock at $13 per share:
Treasury Stock 10,000Additional Paid-in Capital on Common Stock 2,000Retained Earnings 1,000
Cash 13,000
Treasury StockTreasury Stock
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Par Value MethodPar Value Method
Reissuance of 600 shares of treasury stock at $15 per share:
Cash 9,000Treasury Stock 6,000Additional Paid-in Capital on Common Stock 3,000
Treasury StockTreasury Stock
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Par Value MethodPar Value Method
Reissuance of another 200 shares of treasury stock at $8 per share:
Cash 1,600Additional Paid-in Capital on Common Stock 400
Treasury Stock 2,000
Treasury StockTreasury Stock
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Reissuance of another 100 shares of treasury stock at $10 per share:
Cash 1,000Treasury Stock 1,000
Par Value Method
Treasury StockTreasury Stock
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Cost MethodCost Method
Contributed Capital:Common stock, $10 par (20,000 shares authorized, 6,000 shares issued , of which 100 are being held in treasury) $ 60,000 Additional paid-in capital on common stock 12,000 Total contributed capital $ 72,000
Retained earnings 39,900 Accumulated other comprehensive income 10,000 Total contributed capital, retained earnings, and $121,900 accumulated other comprehensive income Less: Treasury stock (100 shares at cost) (1,300)
Total Stockholders’ Equity $120,600
Treasury StockTreasury Stock
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Par Value Method
Contributed Capital:Common stock, $10 par (20,000 shares authorized, 6,000 shares issued) $ 60,000 Less: Treasury stock (100 shares at par) (1,000)Common stock outstanding (5,900 shares) $ 59,000 Additional paid-in capital on common stock 12,600 Total paid-in capital $ 71,600
Retained earnings 39,000 Accumulated other comprehensive income 10,000
Total Stockholders’ Equity $120,600
Treasury StockTreasury Stock
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When stockholders donate shares to the
corporation, the corporation debits Treasury Stock and credits a revenue or
gain account.
Stock Received by DonationStock Received by Donation
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When treasury shares are formally retired, the corporation credits the Treasury Stock account and debits all capital accounts related to the treasury shares on a proportional basis.
Retirement of Treasury StockRetirement of Treasury Stock
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Provides stockholders an option to exchange their shares, within a specified time period, for other classes of stock, usually common stock, at a specified rate.
Accounting treatment is the same as convertible bonds.
Convertible Preferred StockConvertible Preferred Stock
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Ness Corporation originally issued 500 shares of $100 par convertible preferred stock at $120 per share. Each share of preferred stock may be converted into four shares of $20 par common stock.
Preferred Stock, $100 par 50,000Additional Paid-in Capital on Preferred Stock 10,000
Common Stock, $20 par 40,000Additional Paid-in Capital from Preferred Stock Conversion 20,000
ContinuedContinued
Convertible Preferred StockConvertible Preferred Stock
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Alternatively, assume each preferred share may be converted into seven shares of common stock.
Preferred Stock, $100 par 50,000Additional Paid-in Capital on Preferred Stock 10,000Retained Earnings 10,000
Common Stock, $20 par 70,000
Convertible Preferred StockConvertible Preferred Stock
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Rights issued by the corporation that give the holder an option to acquire a specified number of shares of capital stock under prescribed conditions within a stated period of time.The document of ownership is called a stock warrant.
Normally arise:1.As compensation to employees 2.As compensation to employees 3.As fractional share rights4.To make a security more attractive
Stock RightsStock Rights
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Announcement date of the rights offering Issuance date of the rights Expiration date of the rights Between the issuance date and the expiration
date, the rights and the related stock are sold separately and each have a separate price.
Stock RightsStock RightsImportant DatesImportant Dates
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Stock rights issued to existing shareholders in advance of a new stock issuance.
No entries required on announcement date or on issuance date of the rights.
On exercise date◦ debit Cash.◦ credit Capital Stock and Additional Paid-in Capital.
Stock RightsStock RightsPreemptive RightsPreemptive Rights
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Used to-- recruit and retain outstanding employees.-- encourage employee ownership.-- obtain additional capital from equity owners.
Most critical accounting issue is whether the program causes additional expenses for the corporation (or grantor).
Stock Compensation PlansStock Compensation Plans
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New FASB standard requires companies to recognize compensation cost using the fair-value method.*
Under fair-value method, companies use acceptable option-pricing models to value the options at the date of grant.
Stock Compensation PlansStock Compensation Plans
*“Accounting for Stock-Based Compensation,”Statement of Financial Accounting Standards No. 123 (Norwalk, Conn: FASB, 1995); and “Share-Based Payment,”Statement of Financial Accounting Standard No. 123(R) (Norwalk, Conn: FASB, 2004).
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Noncompensatory plans allow employees to purchase stock at a price that
is not significantly lower than the current market price.
Compensatory plans allow employees to purchase stock at a price that
is significantly lower than the current market price at the measurement date.
Stock Compensation PlansStock Compensation Plans
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Criteria stated in APB Opinion No. 25
1. Includes substantially all full-time employees meeting certain criteria.
2. Stock is offered to eligible employees either equally or on the basis of a uniform percentage of salary or wages.
3. Exercise time is limited to a reasonable period.4. The discount from market price is not
significant.
Stock OptionsStock OptionsNoncompensatory PlansNoncompensatory Plans
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Criteria stated in FASB No. 123(R)
1. Substantially all full-time employees participate on an equitable basis.
2. The discount from market is small. 3. The plan offers no substantive option feature.
Stock OptionsStock OptionsNoncompensatory PlansNoncompensatory Plans
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Accounted for based on the cost principle. Record a liability at the time of issuance
-- Valued at amount contributed by employees. On date of issuance of stock
-- debit the liability.-- credit Capital Stock (for par value) and
contributed capital.
Stock OptionsStock OptionsNoncompensatory PlansNoncompensatory Plans
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Any plan that fails to meet one of the four criteria for noncompensatory plans is classified as a compensatory plan.
The measurement date is the first date when the grantor knows-- the number of shares an employee is eligible to
receive.-- the option price.
Stock OptionsStock OptionsCompensatory PlansCompensatory Plans
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Determining ExpenseCompensation expense based on the fair value of the options expected to vest on the date the options are granted to the employee(s) (i.e., the grant date).
Allocating Compensation Expense
Over the periods in which employees perform the service—the service period.
Stock OptionsStock OptionsCompensatory PlansCompensatory Plans
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On January 1, 2006, Nichols Corporation granted 10,000 options to key executives. Each option allows the executive to purchase one share of Nichols’ $5 par value common stock at a price of $20 per share. The options were exercisable within a 2-year period beginning January 1, 2008, if the grantee is still employed by the company at the time of the exercise. On the grant date, Nichols’ stock was trading at $25 per share, and a fair value option-pricing model determines total compensation to be $400,000. On May 1, 2008, 8,000 options were exercised when the market price of Nichols’ stock was $30 per share. The remaining options lapsed in 2010 because executives decided not to exercise their options.
Stock Compensation PlansStock Compensation PlansExampleExample
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No entry on date of grantNo entry on date of grant..
Prepare the necessary journal entries related to the stock option plan for the years 2006 through 2010.
1/1/061/1/06
Compensation expenseCompensation expense 200,000200,000
Paid-in capital-stock options Paid-in capital-stock options
200,000200,000
12/31/0612/31/06
Compensation expenseCompensation expense 200,000200,000Paid-in capital-stock options Paid-in capital-stock options
200,000200,000
12/31/0712/31/07
($400,000 x ½)
Stock Compensation PlansStock Compensation PlansExampleExample
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Prepare the necessary journal entries related to the stock option plan for the years 2006 through 2010.
Cash Cash (8,000 x $20)(8,000 x $20) 160,000160,000
Common stock Common stock (8,000 x $5)(8,000 x $5)
40,00040,000
5/1/085/1/08
Paid-in capital-stock options Paid-in capital-stock options 80,00080,000Paid-in capital-expired options Paid-in capital-expired options
80,00080,000
1/1/101/1/10
($400,000 x 8,000 / 10,000 = $320,000)
Paid-in capital-stock options Paid-in capital-stock options 320,000320,000
Paid-in capital in excess of par Paid-in capital in excess of par
440,000440,000
($400,000 – $320,000)
Stock Compensation PlansStock Compensation PlansExampleExample
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Requires the application of a complex pricing model.
Variables include:Exercise priceCurrent market price of the stockRisk-free rate of interestExpected life of the optionsExpected volatility of the stock priceExpected dividend yield of the stock
Measuring the Fair Value of Fixed Stock OptionsMeasuring the Fair Value of Fixed Stock Options
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Total Compensation
Cost
Fair Value of an option
Number of options
Expected annual forfeiture rate
Service Period
Measuring the Fair Value of Fixed Stock OptionsMeasuring the Fair Value of Fixed Stock Options
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ARE YOU STAYING ABOVE WATER?
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Chapter8
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