Detailed Answer
(c) The 20,000 stock appreciation rights (SAR) each
entitle the holder to receive cash equal to the excess of the market
price of the stock on the exercise date over the market price on
the grant date ($30). Since these SAR are payment for past services
and are exercisable immediately, there is no required service
period. Therefore, the expense computed at 12/31/Y1 does not
have to be allocated to more than one period. At 12/31/Y1,
compensation expense is measured based on the excess of the
12/31/Y1 market price ($45) over the predetermined price
($30), resulting in compensation expense of $300,000 [20,000
($45 – $30)]. Note that if Dean were required to work three
years before the SAR could be exercised, the expense would be
allocated over the three years of required service ($300,000 ×
1/3 = $100,000).