ExpertHard1 markMultiple Choice
CPA · Question 29 · Area II: Technical Accounting
A company grants Stock Appreciation Rights (SARs) that are settled in cash. On Jan 1, Year 1, 1,000 SARs are granted vesting over 2 years. <br/>- Dec 31, Year 1 FV of SAR: $10<br/>- Dec 31, Year 2 FV of SAR: $12<br/><br/>What is the compensation expense for Year 2?
A company grants Stock Appreciation Rights (SARs) that are settled in cash. On Jan 1, Year 1, 1,000 SARs are granted vesting over 2 years. <br/>- Dec 31, Year 1 FV of SAR: $10<br/>- Dec 31, Year 2 FV of SAR: $12<br/><br/>What is the compensation expense for Year 2?
Answer options:
A.
$12,000
B.
$6,000
C.
$7,000
D.
$5,000
How to approach this question
Liability awards: 1. Calculate Target Liability at year-end (Total FV * % Vested). 2. Expense = Target Liability - Liability already booked.
Full Answer
C.$7,000✓ Correct
C
1. Year 1 Expense: 1,000 SARs x $10 FV x 50% vested = $5,000 liability.<br/>2. Year 2 Target Liability: 1,000 SARs x $12 FV x 100% vested = $12,000.<br/>3. Year 2 Expense: $12,000 (Target) - $5,000 (Already recognized) = $7,000.
Common mistakes
Forgetting to subtract prior year expense; ignoring vesting percentage.
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