Question

Identifying and Analyzing Financial Statement Effects of Share-Based Compensation Weaver Industries implements a new share-based compensation plan in 2014. Under the plan, the company's CEO and CFO each will receive non-qualified stock options to purchase 100,000, no par shares. The options vest ratably (1/3 of the options each year) over three years, expire in 10 years, and have an exercise (strike) price of $27 per share. Weaver uses the Black-Scholes model to estimate a fair value per option of $18.

Answer 1

a) below entry will be passed each year for 3 years starting 2014 through 2016

Dr. Share option expense			1200000
		Cr. Equity		1200000
[(200000 × 18) ÷ 3 periods] = 1200000 per period

Financial statement effects template

b) No, Option to buy at $ 27 entitles the CEO right to purchase the share at $ 27, as the company's stock price is $ 24 CEO can purchase the shares directly at $24 instead of exercising option at $27. Exercising the option at this stage would mean a loss of $ 3 per share

Income Statement Balance Sheet Cash Noncash Asset Assets Transaction Contrib. Capital = Liabilities 1 + Earned Capital Revenues - Expenses Net Income Recording of esop expense 1200000 1200000

c) exercising option will have net zero effect on companies financial statement

Income Statement Balance Sheet Cash Noncash Asset Assets Net Transaction Contrib. Capital = Liabilities Earned Capital Revenues - Expenses = Income Exercising esop shares 3600000- 3600000