Question: On December 31, 2009, Farley Camera, Inc., issues 5,000 stock appreciation rights to its president to entitle her to receive cash for the difference between

On December 31, 2009, Farley Camera, Inc., issues 5,000 stock appreciation rights to its president to entitle her to receive cash for the difference between the market price of its stock and a pre-established price of $20. The date of exercise is December 31, 2010, and the required service period is the entire three years. The market price fluctuates as follows: 12/31/10—$23.00; 12/31/11— $21.00; 12/31/12—$26.00. Farley Camera accrued the following compensation expense:
2010 $15,000 2011 $(10,000) 2012 $25,000
Required
a. What is the executive’s main advantage of receiving stock appreciation rights over stock options?
b. In 2010, a $15,000 expense is recorded. What is the offsetting account?
c. What is the financial impact on the company of the exercise of the stock appreciation rights in
2012? How does this impact affect financial statement analysis?

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