Financial Accounting: Liabilities & Equities (FA3) Exam Review

FA3 Exam Review notes Barbara Wyntjes, CGA, MBA, B.Sc.
Part 5: Module 4 continued
Question 5 (11 marks)
On January 1, 2000, SVO Ltd. granted stock options to its chief executive officer (CEO).
This is the only stock option plan that SVO offers. The details of the stock options are set
out below:
Option to purchase 5,000 no-par-value common shares
Option price per share $62.00
Market price per share at grant date $57.00
Stock options expire The earlier of 8 years after issuance or the
employee’s cessation of employment with the
company for any reason other than retirement.
The options are first exercisable The earlier of 4 years after issuance or the date on
which an employee reaches the retirement age of
65.
Fair value at grant date is$10.00. On January 1, 2005, 4,000 of the options were exercised
when the market price of the common shares was $78.00. The rest of the options were
allowed to expire.
Required
8 a. Record the required journal entries for the following dates:
(1) i) January 1, 2000 (issue date)
(2) ii) December 31, 2000 (year-end)
(3) iii) January 1, 2005 (exercise date)
(2) iv) December 31, 2007 (the expiry date of the options)
3 b. Record the required note disclosure on financial reporting for the stock option plan at
December 31, 2000.
Extra: Assuming SVO uses the indirect method for preparing the statement of cash
flows, state the required disclosure in this statement.
8 a.
(1) i) Jan. 1, 2000 (the grant date): Memo entry, describing the options and their terms
(2) ii) December 31, 2000
(1) Compensation expense (5,000 × $10 / 4 years) ................................12,500
(1) Contributed capital — common share options.................................12,500
(To record the grant of stock options to the CEO)
(3) iii) January 1, 2005
(1) Cash (4,000 × $62) ................................................................ 248,000
(1) Contributed capital — common share options
(4,000 / 5,000 × $50,000 1 )............................................................ 40,000
(1) Common shares ............................................................................ 288,000
(To record the exercise of stock options to the CEO)
1 (5,000 × $10.00 or $12,500 per year × 4 years = $50,000)
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