6.Based on the information provided regarding Longhorn’s pension plan, determine whether or not the company must record a minimum liability allowance in its financial statements.
A) No, because the ABO does not exceed the fair value of the plan assets.
B) Yes, because the ABO does not exceed the fair value of the plan assets.
C) No, because the PBO does not exceed the fair value of the plan assets.
D) Yes, because the PBO does not exceed the fair value of the plan assets.
7.Falcon Corporation offers two separate stock compensation award plans to its employees. The first plan is a service-based award and the second plan is a performance-based award that is tied to the market price of Falcon’s stock. Is it necessary for Falcon to adjust compensation expense at the end of the vesting period for awards that do not vest?
| Service-based plan | Performance-based plan tied to Falcon's stock price |
A) Yes Yes
B) No No
C) No Yes
D) Yes No
8.Which of the following statements about stock-based compensation are correct or incorrect?
Statement #1: | The grant date of a service-based award is the date when the employees’ benefits are fully vested. |
Statement #2: | When two or more performance conditions must be satisfied, the requisite service period ends when the first condition is met. |
| Statement #1 | Statement #2 |
A) Incorrect Correct
B) Correct Incorrect
C) Incorrect Incorrect
D) Correct Correct
9.For stock compensation plans, where are the excess tax benefits and the tax benefits related to compensation expense reported in the cash flow statement?
| Excess tax benefits | Tax benefits related to compensation expense |
A) Financing activities Investing activities
B) Operating activities Financing activities
C) Investing activities Financing activities
D) Financing activities Operating activities
6.Based on the information provided regarding Longhorn’s pension plan, determine whether or not the company must record a minimum liability allowance in its financial statements.
A) No, because the ABO does not exceed the fair value of the plan assets.
B) Yes, because the ABO does not exceed the fair value of the plan assets.
C) No, because the PBO does not exceed the fair value of the plan assets.
D) Yes, because the PBO does not exceed the fair value of the plan assets.
Click for Answer and Explanation A)
In accordance with U.S. GAAP standards, if the ABO exceeds the fair value of plan assets, a firm is required to record the difference on the balance sheet as a liability. If necessary, the existing pension asset or liability must be adjusted to this liability value by recording a minimum liability allowance. In Longhorn’s case, the ABO does not exceed the fair value of plan assets, so no adjustment is required.
7.Falcon Corporation offers two separate stock compensation award plans to its employees. The first plan is a service-based award and the second plan is a performance-based award that is tied to the market price of Falcon’s stock. Is it necessary for Falcon to adjust compensation expense at the end of the vesting period for awards that do not vest?
| Service-based plan | Performance-based plan tied to Falcon's stock price |
A) Yes Yes
B) No No
C) No Yes
D) Yes No
Click for Answer and Explanation D)
For both service-based plans and performance-based plans related to a nonstock price goal, it is necessary to adjust compensation expense for awards that do not vest. For performance-based plans tied to the stock price, compensation expense is not adjusted.
8.Which of the following statements about stock-based compensation are correct or incorrect?
Statement #1: | The grant date of a service-based award is the date when the employees’ benefits are fully vested. |
Statement #2: | When two or more performance conditions must be satisfied, the requisite service period ends when the first condition is met. |
| Statement #1 | Statement #2 |
A) Incorrect Correct
B) Correct Incorrect
C) Incorrect Incorrect
D) Correct Correct
Click for Answer and Explanation C)
The grant date is the date an award is approved by the board of directors or compensation committee. When two or more performance conditions must be satisfied, the requisite service period does not end until all conditions are met.
9.For stock compensation plans, where are the excess tax benefits and the tax benefits related to compensation expense reported in the cash flow statement?
| Excess tax benefits | Tax benefits related to compensation expense |
A) Financing activities Investing activities
B) Operating activities Financing activities
C) Investing activities Financing activities
D) Financing activities Operating activities
Click for Answer and Explanation D)
The tax benefits related to compensation expense are reported as operating activities in the cash flow statement. The excess tax benefits are reported as financing activities.
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