STOCK AWARD PLANS ILLUSTRATION

Under its restricted stock award plan, Universal Communications

grants 5 million of its $1 par common shares to certain key
executives at January 1, 2011. The shares are subject to forfeiture
if employment is terminated within 4 years. Shares have a current
price of $12 per share.
January 1, 2011
No entry
Calculate total compensation expense:
$12 fair value per share
x 5 million shares awarded
= $60 million total compensation
The total compensation is allocated to expense over the 4-year
service (vesting) period: 2011 - 2014
$60 million ÷ 4 years = $15 million per year
December 31, 2011, 2012, 2013, 2014 ($ in millions)
Compensation expense ($60 million ÷ 4 years) ............. 15
Paid-in capital – restricted stock ........................ 15
December 31, 2014
Paid-in capital– restricted stock (5 million sh. at $12) ... 60
Common stock (5 million shares at $1 par) ................. 5
Paid-in capital – excess of par (to balance) ............ 55
 If restricted stock is forfeited because, say, the employee quits
the company, related entries previously made would simply
be reversed.
Illustration 19-1
T19-2
 STOCK OPTION PLANS

 Stock option plans give employees the option to purchase

(a) a specified number of shares of the firm's stock, (b) at a
specified price, (c) during a specified period of time.

 The fair value is accrued as compensation expense over the

service period for which participants receive the options,
usually from the date of grant to when the options become
exercisable (the vesting date).

 This requires the use of an option pricing model. The model

should take into account the:
• exercise price of the option
• expected term of the option
• current market price of the stock
• expected dividends
• expected risk-free rate of return during the term of the
option
• expected volatility of the stock

T19-3
 Tax Implications
 For tax purposes, plans can either qualify as an “incentive
stock option plan” under the Tax Code or be "unqualified
plans."

 Among the requirements of a qualified option plan is that

the exercise price be equal to the market price at the grant
date. Under a qualified incentive plan, the recipient pays
no income tax until any shares acquired are subsequently
sold. On the other hand, the company gets no tax deduction
at all.

 With a nonqualified plan the employee can’t delay paying

income tax, but the employer is permitted to deduct the
difference between the exercise price and the market price
at the exercise date.

T19-4