Problem 13.

3
(1) Calculation of remuneration expenses
Year Calculations Current Cumulative
period expense
expense $
$
20x1 (350,000 options × 28/35) × ($0.94 – $0.85) × 1/3 years 8,400 8,400

20x2 (350,000 options × 30/35) × (1.00 – $0.85) × 2/3 years – $8,400 21,600 30,000

20x3 300,000 options × ($1.10 – $0.85) – $30,000 45,000 75,000

20x4 100,000 outstanding options × ($1.20 – $1.10) + 200,000 exercised 30,000 105,000
options × ($1.20 – $1.10)

20x5 100,000 exercised options × ($1.25 – $1.20) 5,000 110,000

(2) Journal entries:

31 December 20x1
Dr Remuneration expense 8,400
Cr Share option reserve – equity 8,400
(Record share-based payment expense for 20x1)
31 December 20x2
Dr Remuneration expense 21,600
Cr Share option reserve – equity 21,600
(Record share-based payment expense for 20x2)

31 December 20x3
Dr Remuneration expense 45,000
Cr Share option reserve – equity 45,000
(Record share-based payment expense for 20x3)
31 December 20x4
Dr Remuneraion expense 30,000

Cr Share option reserve - equity 30,000

(Record share-based payment expense for 20x4)

Dr Cash (200,000 x 0,85) 170,000

Dr Share option reserve – equity 70,000

(200/300 x 105,000)

Cr Share capital 240,000

(Record exercise of 200,000 options at end of 20x4)

31 December 20x5
Dr Remuneration 5,000
expense
Cr Share option reserve - 5,000
equity
(Record share-based payment expense for 20x5)

Dr Cash (100,000 x 85,000

0,85)
Dr Share option reserve- 40,000
equity
(100/300 x 105,000 + 5,000)

Cr Share capital 125,000

(Record exercise of 100,000 options at end of 20x5)

Problem 13.7
In 20x1, earnings increase by 25% and the exercise price decreases by the same percentage point
to $2.25. The estimated fair value of the option is $1.875.
20x1 remuneration expense:
100,000 shares options × 10 × $1.875 x 1/3 = $625,000
In 20x2, earnings increase by 30%. Therefore, the exercise price decreases by 30% to $2.10 and
the estimated fair value of the option increases to $1.95
20x2 remuneration expense:
(100,000 shares options × 10 × $1.95 x 2/3) – $625,000 = $675,000
In 20x3, earnings increase by 33% and the exercise price decreases to $2.01. The estimated fair
value per option increases to $2.00
20x3 remuneration expense:
(100,000 shares options × 10 × $2) - $1,300,000 = $700,000.
31 December 20x1
Dr Remuneration expense 625,000
Cr Share option reserve – equity 625,000
(Record remuneration expense for 20x1.)
31 December 20x2
Dr Remuneration expense 675,000
Cr Share option reserve – equity 675,000
(Record remuneration expense for 20x2.)
31 December 20x3
Dr Remuneration expense 700,000
Cr Share option reserve – equity 700,000
(Record remuneration expense for 20x3.)
1 January 20x4
Dr Share option reserve – equity 2,000,000
Dr Cash (100,000 x 10 x 2) 2,000,000
Cr Share capital 4,000,000
(Record exercise of options)\

Problem 13.8
(Please note that the cash actually paid out is the increase in share price over the exercise price,
that is, the intrinsic value.)
(1) Calculation of remuneration expense
Date Computations Current period expense Cumulative
liability

20x1 20 x 10,000 x 0.95 x $4 x 1/3 $253,333 $253,333

20x2 (20 x 10,000 x 0.95 x $3.50 x 2/3) – $190,000 $443,333

$253,333

20x3 (18 x 10,000 x $4.50) - $443,333 $366,667 $810,000

20x4 (8 x 10,000 x $4.20) - $810,000 + 10 x -$474,000 + $390,000 $336,000

10,000 x $3.90 = - $84,000

20x5 8 x 10,000 x $4.30 0 - $336,000 + 0

$344,000 = $8,000

(2) Journal entries

31 December 20x1
Dr Remuneration expense 253,333
Cr Liability 253,333
(Record remuneration expense and related liability of SARs for 20x1).
31 December 20x2
Dr Remuneration expense 190,000
Cr Liability 190,000
(Record remuneration expense and related liability of SARs for 20x2).
31 December 20x3
Dr Remuneration expense 366,667
Cr Liability 366,667
(Record remuneration expense and related liability of SARs for 20x2).
31 December 20x4
 Dr Liability 474,000
Cr Remuneration expense 84,000
Cr Cash 390,000
(Record writing back of remuneration expense and settlement of liability on exercise
of options)
31 December 20x5
Dr Remuneration expense 8,000
Dr Liability 336,000
Cr Cash 344,000
(Record remuneration expense and settlement of liability on exercise of options)

Summary of remuneration expenses:

20x1 253,333
20x2 190,000
20x3 366,667
20x4 (84,000)
20x5 8,000
Total 734,000

Check:
10 employees x 10,000 SARs x $3.90 = 390,000
8 employees x 10,000 SARS x $4.30 344,000
734,000