Review and test 1 abc corporation on 1 january 20x1

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REVIEW AND TEST 1 - ABC Corporation On 1 January 20x1, ABC Corporation granted 5,000 options on shares to each of its 200 most senior staff. Each option is conditional upon each member of staff staying in the company’s employment until 31 December 20x3. On 31 December 20x3, participating staff can continue to hold the share options and may choose to exercise them on 31 December 20x4 or 31 December 20x5. Each option allows the holder to buy ABC Co shares at a price of $1 each. You are given this data and are required to calculate the expense for each of the years in question. Date Fair value of option ($) Number of participants expected to stay until 31 Dec 20x3 Share price ($) 1 Jan 20x1 3.30 180 4.00 31 Dec 20x1 3.40 175 4.20 31 Dec 20x2 3.45 180 4.25 31 Dec 20x3 2.95 165 3.80 31 Dec 20x4 3.10 165 3.95 31 Dec 20x5 3.30 165 4.30
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Page 35 0 0 REVIEW AND TEST 1 - Wright On 1 January 20x1, Wright Co granted 15,000 cash appreciation rights to 150 of its staff. These rights gave a bonus in cash based on the price of Wright Co’s shares. The cash appreciation rights offered a cash payment equal to the company’s share price at the exercise date, less the share price at thegrant date. Participants have to stay in Wright Co’s employment until 31 December 20x3 in order for the rights to vest, though they may exercise on either 31 December 20x3, 31 December 20x4 or 31 December 20x5. Date Number of options exercised in the period (000’s) Number of participants expected to stay until 31 Dec 20x3 Share price ($) 1 Jan 20x1 0 140 1.20 31 Dec 20x1 0 140 1.45 31 Dec 20x2 0 142 1.50 31 Dec 20x3 1,100 144 1.52 31 Dec 20x4 800 144 1.60 31 Dec 20x5 260 144 1.48
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Page 36 Step 1: This is a cash settled transaction, which therefore gives rise to a liability. As a liability, the expected value must be revalued each year. Step 2: The vesting period is three years. Although people may stay longer than that, the company cannot presume that they will voluntarily stay longer than the minimum required. Step 3: The cumulative cost in each year is now worked out, including updates of cost in the last two years after the first vesting period but before the latest possible exercise date. Date Liability recognised ($’000) Increase in liability ($’000) 1 Jan 20x1 (15,000 x 140 x (1.20 1.20) x 0/3 0 0 31 Dec 20x1 (15,000 x 140 x (1.45 1.20) x 1/3 175,000 175,000 31 Dec 20x2 (15,000 x 142 x (1.50 1.20) x 2/3 426,000 251,000 31 Dec 20x3 (15,000 x 144 x (1.52 1.20) x 3/3 691,200 262,200 Liability for Cash Appreciation Rights 1.1.x1 b/c 0 31.12.x1 Expense 175,000 31.12.x2 Expense 251,000 31.12.x3 c/d 691,200 31.12.x3 Expense
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