• Where options are not exercised by a specific date they lapse.
Share options (Example 6) • On 30 June 2012, ABC issued 10,000 options valued at $1 each to the CEO as payment for past services • Each option entitles the CEO to acquire a share in the company for $3 • The options must be exercised within 12 months of issue date- after this time they will lapse
Share options (Example 6) Required: Prepare the journal entries to account for the issue and exercising of the options assuming: a) The options are issued for no consideration. On 1 May 2013, when the share price is $3.10, the CEO exercises the options. b) The options are issued for no consideration. The options are not exercised by the CEO and lapse on 30 June 2013. c) The options are issued for $1 each. By 30 June 2013, 9,000 of the options have been exercised.
Share options (Example 6) 30 June 2012 (same entry for a) and b)) Dr Wages expense10,000 Cr Options 10,000 Issue of options to CEO a) 1 May 2013 Dr Cash 30,000 Dr Options 10,000 Cr Share capital 40,000 Exercising of options by CEO b) 30 June 2013 Dr Options 10,000 Cr Lapsed options reserve 10,000 Transfer of balance to a reserve account on the lapsing of the options
Share options (Example 6) c) 30 June 2013 Dr Cash 10,000 Cr Options 10,000 Issuing of options 1 July 2012 - 30 June 2013 Dr Cash 27,000 Dr Options 10,000 Cr Share capital 36,000 Cr Lapsed options reserve 1,000 Exercising of 9,000 options to 30 June 2013 and transfer of balance to a reserve account on the lapsing of the options (10,000 x $1) (10,000 x $1) (9,000 x $3) (9,000 x $3) (1,000 x $1) (1,000 x $1)
• Such shares either: – Give the holder the right to be repaid his/her capital Or – Give the company the right to repay the capital • Main issue is the classification of such shares – Are they equity, liabilities or a combination of both? 10. Redeemable preference shares
Shares can be redeemed from: 1. Proceeds of a fresh issue of shares 2. Retained earnings – Additionally, the company’s constitution may specify payment of a redemption premium which is paid from profit – On redemption the shares are cancelled and cannot be reissued Redeemable preference shares - equity
Dr Share Capital - Preference $x Cr Shareholders redemption $x Transfer of preference capital to redemption account Dr Shareholders redemption $x Cr Cash $x Redemption of preference shares Dr Cash/ Retained earnings $x Cr Share Capital - Ordinary $x Receipt of cash on issue of new shares Redeemable preference shares - equity Cash a/c applies to issues of new shares; retained earnings a/c applies to redemption from profits Cash a/c applies to issues of new shares; retained earnings a/c applies to redemption from profits The shareholders redemption account is a clearing account The shareholders redemption account is a clearing account
• Redeemable preference shares with the following characteristics are more in the nature of liabilities: – Redeemable in cash on a certain date or at the option of the holder – Cumulative as to the payment of dividends – Non-participating in further dividends distributions – Priority capital return rights • Accounting process required when accounting for redeemable
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- One '11
- Corporate Finance, Share capital