International Accounting
International Accounting
5th Edition
ISBN: 9781259747984
Author: Doupnik, Timothy S., Finn, Mark T., Gotti, Giorgio
Publisher: Mcgraw-hill Education,
Question
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Chapter 5, Problem 41EP

Part A

(a)

To determine

Prepare journal entries to record settlement of share based payment under cash alternative.

Part A

(a)

Expert Solution
Check Mark

Explanation of Solution

Share Based Payments:

Sometimes organizations offer to issue equity shares as a consideration, to employees or other parties such consideration is referred as share based payment. IFRS recognizes three types of share based payments that are, equity-settled, cash-settled or having choice of settlement.

Journalizing:

Journalizing is the process of recording the transactions of an organization in the order of happening of events. Based on these journal entries recorded, the accounts are posted to the relevant ledger accounts.

Accounting rules for journal entries:

  • To increase balance of the account: Debit assets, expenses, losses and credit all liabilities, capital, revenue and gains.
  • To decrease balance of the account: Credit assets, expenses, losses and debit all liabilities, capital, revenue and gains.

Recording compensation expense:

DateAccount Title and ExplanationPost Ref.

Debit

($)

Credit

($)

31/12/01Compensation expense 1,867 
      Share based payment liability  1,867
 (to record compensation)   

Table (1)

  • Since, compensation expense is an expense and expense is increased. Hence, compensation expense account is debited.
  • Since, share based payment liability is a liability and liability is increased. Hence, share based payment liability account is credited.

Recording compensation expense:

DateAccount Title and ExplanationPost Ref.

Debit

($)

Credit

($)

31/12/02Compensation expense 1,867 
      Share based payment liability  1,867
 (to record compensation)   

Table (2)

  • Since, compensation expense is an expense and expense is increased. Hence, compensation expense account is debited.
  • Since, share based payment liability is a liability and liability is increased. Hence, share based payment liability account is credited.

Recording compensation expense:

DateAccount Title and ExplanationPost Ref.

Debit

($)

Credit

($)

31/12/03Compensation expense 2,566 
      Share based payment liability  2,566
 (to record compensation)   

Table (3)

  • Since, compensation expense is an expense and expense is increased. Hence, compensation expense account is debited.
  • Since, share based payment liability is a liability and liability is increased. Hence, share based payment liability account is credited.

Recording settlement, if company chooses cash alternative:

DateAccount Title and ExplanationPost Ref.

Debit

($)

Credit

($)

31/12/03Share based payment liability 6,300 
      Cash  6,300
 (to settle compensation)   

Table (4)

  • Since, share based payment liability is a liability and liability is decreased. Hence, share based payment liability account is debited.
  • Since, cash is an asset and asset is decreased. Hence, cash account is credited.

Working Note:

Computation of option expense:

Expense=(Numberofoptions×FairvalueVestingperiod×Expiredperiod)Expenserecordedearlier

Computation of Year 1 expense:

Expense=((7×100)×$83×1)$0=$1,867

Computation of Year 2 expense:

Expense=((7×100)×$83×2)$1,867=$1,867

Computation of Year 3 expense:

Expense=((7×100)×$93×3)($1,867+$1,867)=$2,566

(b)

To determine

Prepare journal entries to record settlement of share based payment under share alternative.

(b)

Expert Solution
Check Mark

Explanation of Solution

Compensation entries would remain same as in cash alternative however, settlement entry would differ which is presented as follows:

Recording settlement, if company chooses share alternative:

DateAccount Title and ExplanationPost Ref.

Debit

($)

Credit

($)

31/12/03Share based payment liability 6,300 
      Common stock (700×$1)  700
      Additional paid-in capital (700×$8)  5,600
 (to settle compensation)   

Table (5)

  • Since, share based payment liability is a liability and liability is decreased. Hence, share based payment liability account is debited.
  • Since, common stock is capital and capital is increased. Hence, common stock account is credited.
  • Since, additional paid-in capital is capital and capital is increased. Hence, additional paid-in capital account is credited.

Part B

To determine

Compute the fair value of the stock options at the grant date and the amount to be recognized as compensation expense in Year 1.

Part B

Expert Solution
Check Mark

Explanation of Solution

Since, under equity option, fair value is different from cash option due to discount; therefore, fair value of equity component would be greater than zero.

Computation of fair value of options at the grant date:

International Accounting, Chapter 5, Problem 41EP , additional homework tip  1

Table (6)

Computation of option expense in Year 1:

International Accounting, Chapter 5, Problem 41EP , additional homework tip  2

Table (7)

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Chapter 5 Solutions

International Accounting

Ch. 5 - 11. What are the rules related to the recognition...Ch. 5 - Prob. 12QCh. 5 - Prob. 13QCh. 5 - What are the five steps that entities take to...Ch. 5 - Prob. 15QCh. 5 - Prob. 16QCh. 5 - Prob. 17QCh. 5 - What is breakage revenue?Ch. 5 - What are the three categories of financial assets...Ch. 5 - Prob. 20QCh. 5 - Prob. 21QCh. 5 - What is the primary difference between how IFRS...Ch. 5 - Prob. 23QCh. 5 - Prob. 24QCh. 5 - Prob. 25QCh. 5 - Prob. 26QCh. 5 - Prob. 27QCh. 5 - A cement manufacturer has cement plants around the...Ch. 5 - Prob. 29QCh. 5 - How much revenue must be generated by a companys...Ch. 5 - How is a major customer defined?Ch. 5 - 1. Halifax Corporation has a December 31 fiscal...Ch. 5 - 2. Bull Arm Company has the following items at...Ch. 5 - 3. Melbourne Inc. became involved in a tax dispute...Ch. 5 - Prob. 4EPCh. 5 - Prob. 5EPCh. 5 - Prob. 6EPCh. 5 - Prob. 7EPCh. 5 - 8. Sandoval Company operates in a country in which...Ch. 5 - Which of the following is a criterion that must be...Ch. 5 - Prob. 10EPCh. 5 - Siam Financial Corp. (SFC) actively trades bonds...Ch. 5 - A 3 million loan paying annual interest at a 5...Ch. 5 - Monterrey Properties enters into a 3-year lease...Ch. 5 - 10. An entity must adjust its financial statements...Ch. 5 - Prob. 15EPCh. 5 - Prob. 16EPCh. 5 - Prob. 17EPCh. 5 - Prob. 18EPCh. 5 - Prob. 19EPCh. 5 - Prob. 20EPCh. 5 - Prob. 21EPCh. 5 - Prob. 22EPCh. 5 - Prob. 23EPCh. 5 - Prob. 24EPCh. 5 - Prob. 25EPCh. 5 - Prob. 26EPCh. 5 - Prob. 27EPCh. 5 - Prob. 28EPCh. 5 - Prob. 29EPCh. 5 - Prob. 30EPCh. 5 - Prob. 33EPCh. 5 - Prob. 34EPCh. 5 - Prob. 35EPCh. 5 - Prob. 36EPCh. 5 - Prob. 37EPCh. 5 - Prob. 38EPCh. 5 - On January 1, Year 1, Autonomous Systems Ltd....Ch. 5 - Prob. 40EPCh. 5 - Prob. 41EPCh. 5 - Prob. 42EP
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