163. What is restricted stock? Describe how compensation expense is determined and recorded for a restricted stock plan.

Answer: Restricted stock refers to shares actually awarded in the name of an employee, although the employer might retain possession of the shares. Typically, the shares must be forfeited if employment is terminated within a specified number of years. Usually, the employee is not free to sell the shares during the restriction period. Restrictions provide an incentive for the employee to stay with the company. Compensation expense is the fair value of the awarded shares on the date of the award. The compensation expense is accrued over the service period required under the restriction.

Learning Objective: 1 Level of Learning: 2

164. The tax code differentiates between qualified and nonqualified incentive plans. What are the major differences in tax treatment between the two?

Answer:

Under a qualified plan, the recipient pays no tax at the time of the grant or exercise of the options. The tax on the difference between the option price and the market price at the exercise date is paid on the date any shares acquired are subsequently sold. The employer gets no tax deduction at all.

Under a nonqualified plan, the employee cannot delay paying tax. On the other hand, the employer is allowed to deduct the difference between the option price and the market price on the date of exercise.

Learning Objective: 2 Level of Learning: 1

165. What is the advantage of a stock appreciation right over stock options?

Answer: With stock appreciation rights, employees can benefit from increased value of a company's shares without having to buy the stock.

Learning Objective: 3 Level of Learning: 1

Spiceland/Sepe/Tomassini, Intermediate Accounting, Fourth Edition 75