Read the answer to number three. I messed up question 2 by accident (of course). Did you guys read this anywhere? Jason Johnson, CFA, is a principal of a large private equity firm in New York. One of the associates in his firm has identified a potential investment opportunity for the firm. Gasline, Inc. is a major producer of pipeline used in the production of natural gas in the Southwest United States. Last year, Gasline had approximately $150 million in sales, and sales are expected to increase as a result of increasing demand for their product. The company was founded over twenty-five years ago, and has been publically traded for the last ten years. The founder of the company, along with other members of the family, holds the majority of the common stock, and the group is amenable to liquidating their collective position at this time. Johnson’s associate believes there is significant opportunity in the industry, based upon new technology that allows for the extraction of natural gas from locations and depths that previously were too cost-prohibitive. This new technology should translate into increased demand for the industry, both domestically and abroad. Johnson concurs with this forecast for the industry, but believes further in-depth analysis must be performed before any investment decision can be made. Of particular concern to Johnson is Gasline’s numerous, complicated transactions related to the company’s various stock-based compensation plans. Over the past decade, the company has participated in varying degrees in programs involving stock option grants, an employee stock purchase plan, and performance-based awards. Johnson believes that thorough analysis of each program will determine whether or not the programs were properly accounted for in Gasline’s financial statements. * The CEO of Gasline was awarded a stock option package at the beginning of 2006, which could ultimately have a significant impact on the company’s future earnings. Details of the CEO’s stock option grant are outlined below. * The company established an employee stock purchase plan in 2004. Under the existing plan guidelines, full-time employees of Gasline that have completed 3 years of service are eligible to purchase up to 1,000 Gasline shares per year at a 15% discount. Since inception of the program, employees of the company have purchased approximately 75,000 shares. In the footnotes to the company’s financial statements, it states that Gasline’s management has determined that the plan is noncompensatory and therefore no compensation expense has been recognized in association with the plan. * Part of the total compensation package for Gasline employees comes through participation in a service-based stock awards grant program. Under this program, all full-time employees are awarded 100 shares of Gasline common stock on July 1st of each year. Employees vest at the rate of 20% each year, and are fully vested after the completion of five years of service. Employees that leave the company or retire prior to being fully vested forfeit all interest in the stock. Johnson questions whether or not Gasline’s accounting treatment of this program is fully in accordance with FASB standards. CEO Options (grant date January 1, 2006) Strike price $37.00 Current market price $35.00 Number of options 100,000 Option period 4 years Vesting period 25% per year For the valuation of the CEO’s stock options granted on January 1, 2006, Gasline estimated a fair value of $100,000 by using Monte Carlo simulation. In accordance with SFAS No. 123®, which of the following statements is most accurate? Gasline’s accounting treatment of the options is: A) in compliance because the firm can elect to use either the intrinsic value model or the fair value model in the valuation of stock option plans. B) in compliance because a Monte Carlo simulation is an acceptable method of valuing options in the absence of a market-based instrument. C) not in compliance because the fair value must be established by using the Black-Scholes option pricing model. Your answer: B was correct! Under SFAS No. 123®, firms are required to use the fair value method of valuing stock option plans. In the absence of a market-based instrument, firms may select and use an option-pricing model such as the Black-Scholes, the binomial model or Monte Carlo. ---------- Assume that the CEO of Gasline exercises 25,000 of his options on December 31, 2006, and the market price of the stock on that date is $39.50. Calculate the total compensation expense for the year ending 2006 that Gasline should recognize in association with the CEO option grant. A) $62,500. B) $25,000. C) $100,000. Your answer: A was incorrect. The correct answer was B) $25,000. Under the fair value method, as required by SFAS No. 123®, Gasline will recognize compensation expense over the 4 year vesting period. For the year ending 2006, Gasline will recognize $25,000 (= $100,000 / 4 years) in compensation expense. Compensation expense is not affected when options are exercised. -------------------- In accordance with SFAS No. 123®, which of the following statements regarding Gasline’s employee stock purchase plan is most accurate? A) The plan cannot be considered noncompensatory because the discount exceeds the per share transaction cost of a public offering. B) The plan can be considered noncompensatory because it is offered equally to all full-time employees, not just upper management. C) The plan can be considered noncompensatory because of the existence of the service-based stock awards grant program. Your answer: A was correct! If an employee stock purchase plan is considered noncompensatory under the guidelines of SFAS No. 123®, then the company is not required to recognize any compensation expense associated with the program. One of the several criteria that must be met in order to be considered noncompensatory is that the discount cannot exceed the per share transaction cost of a public offering, typically 5% or less. The 15% discount offered by the Gasline plan is clearly in excess of the safe harbor amount, and therefore the plan cannot be considered noncompensatory.
never heard of this…where is this from stalla or schweser?
Schweser
just skimmed schweser share based comp section…definitely no mention of this anywhere…
Let’s leave it alone then, there is already too much crap I have to fill my head with 
whenever you see something with a number on it… like 123® in this chapter, SFAS 99 on the chapter with relation to Financial reporting Quality, FAS115 in the Intercorporate investments chapter - these are old questions - related to previous years. The numbers 123, 140, 160, 115 are mentioned in the book - but nothing noteworthy with regards to them is mentioned. Disregard the SFAS #…
good looks cpk
bch – started early tonight, what you drinking? eh?? looks good became good looks. I now know we have a serious problem on our hands 
… joking… of course…
cpk123 Wrote: ------------------------------------------------------- > bch – started early tonight, what you drinking? > eh?? looks good became good looks. I now know we > have a serious problem on our hands … > joking… of course… lol…I wish I was drinking…it’s okay thoughy…60 more days…than all the wild turkey I can have…