Identifying and Analyzing Financial Statement Effects of Share-Based Compensatio

Question

Identifying and Analyzing Financial Statement Effects of Share-Based Compensation
Weaver Industries implements a new share-based compensation plan in 2009. Under the plan, the company's CEO and CFO each will receive non-qualified stock options to purchase 300,000, no par shares. The options vest ratably (1/3 of the options each year) over three years, expire in 10 years, and have an exercise (strike) price of $21 per share. Weaver uses the Black-Scholes model to estimate a fair-value per option of $15. The company's tax rate is 40%.

(a) Use the financial statement effects template to record the compensation expense related to these options for each year 2009 through 2011. Include the effects of any anticipated deferred tax benefits.

Balance Sheet

Income Statement

Balance Sheet

Transaction Cash Asset + Noncash Assets = Liabilities + Contributed Capital + Earned Capital Compensation expense each year:
2009 through 2011 Answer Answer Answer Answer Answer Deferred tax benefits each year:
2009 through 2011 Answer Answer Answer Answer Answer

Explanation / Answer

(a) Option expense = {[(No. of options expected to be excercised x Fair value per option)/vesting perios]xno. of years expired} - expenses already recognised

Option expense for 2009 = (300000 x $15)/3 - 0

= $1500000

Option expense for 2010 = [(300000 x $15)/3] x 2 - $1500000

= $1500000

Option expense for 2011 = [(300000 x $15)/3] x 3 - $3000000

= $1500000

Calculation of defferd tax benefit

Defferd Tax benefit for 2009 = $1500000 x 40% = $600000

Defferd Tax benefit for 2010 = $1500000 x 40% = $600000

Defferd Tax benefit for 2011 = $1500000 x 40% = $600000

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