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The state I have chosen is Nebraska. Please help me with the rehabilitation programs in this state, how the programs works and goals. Please guide me in the right direction.
Smaller Corporation has been in operation for several years. Each year, around the holidays, Smaller gives a cash bonus to each of its employees and records the bonuses as compensation expense. Smaller has reached the point at which it is now making a reasonable return on its shareholders’ equity. At the end of the current year, the company president is considering establishing a compensatory share option plan for Smaller’s key executives, instead of paying cash bonuses to any of its employees. At this time, the market price and the planned option (exercise) price of the company’s common stock are the same. The plan would allocate a specified number of options to each executive based on the executive’s level within the company and meeting Smaller’s targeted income goals. The service period would be 3 years and the options would have to be exercised within 10 years.
You are the controller for Smaller and one of the key executives who would participate in the plan. You also already own a substantial number of shares of Smaller common stock. The company president comes to you for advice about this plan and says, “If Smaller establishes this plan, it will work out for all of us. It looks like the plan is pretty valuable, since an option pricing model shows a high fair value for each option. The corporation will be saving cash because it won’t have to pay bonuses to either the executives or the other employees. But executives will manage better because their share options will depend on meeting the company’s targeted income. Because the market price and the option price are the same, there won’t be any compensation cost or expense related to this plan. Furthermore, since no bonuses would be paid to any employees, the corporation will decrease its compensation expense. This will increase its net income and earnings per share compared to last year, as well as its return on shareholders’ equity. So the stock value will go up. This seems like a win-win situation for everyone. Am I right on this?” Do you think Smaller should adopt this compensatory share option plan?
Required:
From financial reporting and ethical perspectives, how would you reply to the president?
The shareholders’ equity section of Superior Corporation’s balance sheet as of December 31, 2012, is as follows:
| Shareholders’ Equity | ||
| Preferred stock, $100 par value; authorized, 360,000 shares; issued, 36,000 shares | $3,600,000 | |
| Common stock, $5 par value; authorized, 2,400,000 shares; issued, 480,000 shares | 2,400,000 | |
| Paid-in capital in excess of par—preferred | 144,000 | |
| Paid-in capital in excess of par—common | 1,020,000 | |
| Retained earnings | 3,300,000 | |
| $10,464,000 |
| The following events occurred during 2013: | |
| Jan. 5 | 30,000 shares of authorized and unissued common stock were sold for $9 per share. |
| Jan. 16 | 30,000 shares of authorized and unissued preferred stock were sold for $106 per share. |
| April 1 | 80,000 shares of common stock were repurchased for the treasury at a price of $20 per share. Superior uses the cost method to account for treasury stock. |
| Sept. 1 | 5,000 shares of preferred stock are issued in exchange for a piece of land. The land has an appraised value of $535,000. The preferred stock currently trades on the New York Stock exchange at a price of $106 per share. |
| Dec. 1 | 35,000 shares of treasury stock are reissued at a price of $25 per share |
Below is the Journal Entry:
On January 1, West Company had outstanding 10,000 shares of $10 par common stock, which had been originally issued at an average price of $35 per share. During the year, West engaged in the following treasury stock transactions:
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