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Can you please explain the question 25 c – William of the BPP revision kit. I totally understood the up to the vesting period. The payment is what got me confused.
Hi,
Yes, it’s a bit tricky this one as rather unusually it looks at the treatment after the vesting date. The difficulty here is that instead of just looking at the movement in the FV from May X2 to May X3, we also have to deal with the cash payment to the 7 directors who exercised their rights.
Firstly I’d calculate the FV at the start and end of the year in the usual fashion, but be careful of the number of directors. The cash payment can then be calculated using the intrinsic value. Personally I’d then process two separate journal entries.
Firstly I’d process the cash payment DR Liability 73,500 CR Bank 73,500
This would reduce the liability to $45,500.
I’d then look at the movement in the liability from $45,500 to $120,000, which is an increase of $74,500. DR P/L 74,500 CR Liability 74,500.
If you net the two entries then you get the answer in the back.
Hope that helps, it’s the only time I recall the examiner looking at what has happened after the vesting date.
Thanks
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