(Restricted Stock and Stock Appreciation Rights) In 2005 Sanford Co. adopted a plan to give additional incentive compensation to its dealers to sell its principal product, fire extinguishers. Under the plan Sanford transferred 9,000 shares of its $1 par value stock to a trust with the provision that Sanford would have to forfeit interest in the trust and no part of the trust fund could ever revert to Sanford. The restricted shares were to be distributed to dealers on the basis of their shares of fire extinguisher purchases from Sanford (above certain minimum levels) over the 3-year period ending June 30, 2008.

In 2005 the stock was closely held. The book value of the stock was $7.90 per share as of June 30, 2005, and in 2005 additional shares were sold to existing stockholders for $8 per share. On the basis of this information, market value of the stock was determined to be $8 per share.

In 2005 when the shares were transferred to the trust, Sanford charged prepaid expenses for $72,000 ($8 per share market value) and credited common stock for $9,000 and additional paid-in capital for $63,000. The prepaid expense was charged to operations over a 3-year period ended June 30, 2008.
Sanford sold a substantial number of shares of its stock to the public in 2007 at $60 per share.
In July 2008 all shares of the stock in the trust were distributed to the dealers. The market value of the shares at date of distribution of the stock from the trust had risen to $110 per share.
Instructions

(a) How much should be reported as selling expense in each of the years noted above.

(b) Sanford is also considering other types of option plans. One such plan is a stock appreciation rights (SARs) plan. What is a stock appreciation rights plan? What is a potential disadvantage of a SAR plan from the viewpoint of the company?