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Hi Mike
in the note (v) about share options. i dont understand this whole calculation.
on 1/6/2007- $3m paid to employees and paid in cash 30/11/2008
on 1/6/2007- $3m paid to employees in share options on 30/11/2008.can you please help me with this calculation.
Hi Mike
in Ribby 6/2008, note (vii)
the treatment of sale of inventor. $4m is unrealised profit. CR Inventory, DR RE to eliminate the sales.
why DR sales $6m and CR cash $6m, and why CR purchases $6m and DR Cash $6m.
thanks
1) 3m to be paid in cash on 30 November is a certain liability
The 3m share options are only 2/3 through the vesting period and the directors estimate that 10% of the employees that are potentially entitled will leave the company before the shares vest. Thus, to allocate the benefit over the periods during which that expense is incurred gives us the calculation 2/3 (proportion of vesting period elapsed) x 90% (percentage of employees expected to be entitled to be granted / given the bonus) x $3m (value of the share options at grant date)
Is that ok?
Re the “sale” of inventory, is it really a sale? Fair representation? Or are we looking at a clear case of manipulation and distortion? This goes beyond creativity!
Just how creative can one be? The examiner leaves you in no doubt “After the year end the transaction was reversed and it was agreed that this type of transaction would be carried out again when the interim financial statements were produced for Hall, if the company had not been sold by that date.”
So, to correct the manipulation, we need to reverse the entry by removing the $6m from revenue / sales and by reducing cost of sales. The two cash entries cancel but the revenue is overstated and giving a false impression.
OK?
see the 2/3 months is that from vesting period 1/6/2007-30/11/2008= 18months.
the granting period is from 31/5/2008- 30/11/2008= 6 months.
so it is 6/18months x 90% x 3m= 1.8. which goes to OCE OR OCI?
in the solutions they stated 12/18 months?
Thanks
In the solutions they Dr retained earnings 4.8 cr current liability 3 and cr oce 1 8. For some reason they have not taken 4 8 to RE but rather 1.8m. I don’t understand why.
Granted on 1 June 2007, vesting on 31 May, 2008, payable on 30 November, 2008
Time between announcement and payment is 18 months, twelve of which have passed by the year end. Hence 12/18 or 2/3
In my copy of the answer (copied here) there is a 4.8 debit in Retained earnings!
Retained earnings 120 11·2 1·3 (0·2)
(0·8)
(1)
(4·8)
(3·5)Working W2 in the official solution
is the 4.8 share options? as in the solutions 3m is cash bonus and 1.8 is share options.
I believe the 4.8 is the aggregate of the 3m cash + the 1.8m share options. The entire 4.8 has been debited to income statement.
The bonus is made up of two parts, each worth nominally 3m.
In order to arrive at 4.8, there must be an element of both parts since neither part exceeds 3m (but all this is shown in the examiner’s answers)
I believe the 4.8 is the aggregate of the 3m cash + the 1.8m share options. The entire 4.8 has been debited to income statement.
The bonus is made up of two parts, each worth nominally 3m.
In order to arrive at 4.8, there must be an element of both parts since neither part exceeds 3m (but all this is shown in the examiner’s answers)
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