1.

On January 1, Year One, a company gives its president 1,000 options to buy stock in the
company. The market price on that date is $32 per share and the option price is $30 per
share. The price increases to $40 per share by December 31, Year One. The president has to
work for four years to earn these options and then has an additional two years in which to
make the purchase. A computer pricing model values these options at $6 each on January 1,
Year One, and at $12 each on December 31, Year One. What amount of expense should the
company recognize for Year One?
A -0B $500
C $1,500
D $3,000
2. On January 1, Year One, the Lincoln Company gives its president 1,000 options to buy stock
in the company. The market price on that date is $36 per share and the option price is $35
per share. The price increases to $40 per share by December 31, Year One and then to $42
on December 31, Year Two. The president must work for five years to earn these options and
then has an additional two years in which to make the purchase. A computer pricing model
values these options at $8 each on January 1, Year One, at $10 each on December 31, Year
One, and at $12 each on December 31, Year Two. What amount of expense should the
company recognize for Year Two?
A -0B $200
C $400
D $1,600
3. In a noncompensatory stock option plan, the company does not recognize any expense in
connection with the options being given to employees. On January 1, Year One, the Adams
Company awarded its president 1,000 options to buy its common stock for $96 per share
when the price of the stock on a stock exchange was $100. The purchase had to be made by
January 29, Year One. Which of the following statements is true?
A This is a compensatory plan because the price of the stock was set at a figure below the
market value of the stock.
B This is a compensatory plan because the president did not have to make the purchase
immediately.
C This is a compensatory plan because only the president received stock options.
D This is a compensatory plan because the president had less than 31 days to make the
purchase.
4. On June 1, Year One, a company issued stock options to all of its employees. A total of
40,000 options were split equally among the employees. An option pricing model (BlackScholes) values these options at $1.65 each on that date. The employees were given until
the end of June to convert their options and the option price was set at $57 although the fair
value of the stock on that day was $60. The options were all, eventually, converted on June
25, when the fair value of the stock had risen to $62. What is the total amount of expense to
be recognized by the company?
A Zero
B $66,000
C $120,000

D $200,000
5. When a company issues stock options to employees that are classified as compensatory, a
computer pricing model must be used to determine the value of those options based on six
specific variables. Which of the following is not one of the variables that must be taken into
account?
A Exercise price of the option
B Expected volatility of the price of the stock
C Expected income to be earned by the company over the life of the options
D Current market price of the stock
6. On January 1, Year One, the Wilson Company gives its president the 1,000 rights to receive
cash equal to the increase in the market price of the company's stock. The market price on
that date is $23 per share but increases to $28 per share by December 31, Year One. The
president has to work for four years to earn these rights. A computer pricing model values
these rights at $7 each on January 1, Year One, and at $10 each on December 31, Year One.
What amount of expense should the company recognize for Year One?
A -0B $1,750
C $2,500
D $3,000
7. On January 1, Year One, the Landow Company gives its president the 1,000 rights to receive
cash equal to the increase in the market price of the company's stock. The market price on
that date is $37 per share but increases to $40 per share by December 31, Year One, and
$50 per share on December 31, Year Two. The president has to work for four years to earn
these rights. A computer pricing model values these rights at $8 each on January 1, Year
One, at $12 each on December 31, Year One, and $20 on December 31, Year Two. What
amount of expense should the company recognize for Year Two?
A -0B $2,000
C $5,000
D $7,000
8. On January 1, Year One, the Marston Company gives its president the 1,000 rights to receive
cash equal to the increase in the market price of the company's stock. The market price on
that date is $52 per share but increases to $56 per share by December 31, Year One, and
$59 per share on December 31, Year Two. The president has to work for four years to earn
these rights. A computer pricing model values these rights at $10 each on January 1, Year
One, at $12 each on December 31, Year One, and $14 on December 31, Year Two. Which of
the following properly indicates the amounts to be recognized on Year Two financial
statements?
A No expense and no liability
B Expense of $4,000 and a liability of $7,000
C Expense of $2,500 and a liability of $5,000
D Expense of $3,000 and a liability of $6,000
9. Jackson, Inc. is a publicly-held corporation. At the beginning of Year One, the company issues
10,000 stock options to its president. They can be exercised but only if the president works

until the end of Year Four. She then has two additional years to actually make the
conversion. The price of the stock on the first day of Year One is $40 and goes up $1 per
month thereafter ($52 at the end of Year One, $64 at the end of Year Two and so on). A
computer option pricing model is used to determine the value of the options on January 1,
Year One ($6), December 31, Year One ($10), and December 31, Year Two ($16). How much
expense should the company recognize for Year Two in connection with this award?

A $10,000
B $12,000
C $15,000
D $24,000
10. At the beginning of Year One, the employees of the Memphis Corporation were awarded
20,000 stock options. They were viewed as compensatory because not all employees were
included in this award. The employees were required to work for four years (until December
31, Year Four. After that, they could convert the options at any time during Year Five. When
granted, an appropriate computer pricing model calculated the value of one of these options
as $32. The same computer pricing model was used at the end of that year and arrived at a
value for one option of $30. How much expense should the Memphis Corporation report for
Year One?
A $120,000
B $128,000
C $150,000
D $160,000
11. On January 1, Year One, the Waxman Company issues 10,000 stock options to its president.
Stock can be bought for $25 per share but only if the president works with the company for
four years. She then has two additional years in which to exercise the options. The price of
the stock is $29 on January 1 but climbs to $37 on December 31, Year One. A computer
pricing model values the option at $8 on January 1, Year One, and at $16 on December 31,
Year One. If this is a compensatory stock option, what expense should the company
recognize for Year One?
A Zero
B $10,000
C $20,000
D $40,000