Identifying and Analyzing Financial Statement Effects of Share-Based Compensation Weaver Industries implements a new share-based compensation plan in 2017. Under the plan, the company's CEO and CFO each will receive non-qualified stock options to purchase 100,000, 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 $27 per share. Weaver uses the Black-Scholes model to estimate a fair-value per option of $18. (a) Use the financial statement effects template to record the compensation expense related to these options for each year 2017 through 2019. Use negative signs with answers, when appropriate. Balance Sheet Income Statement Noncash Assets Cash Asset + + + Contributed Capital 0 x Transaction Compensation expense recorded each year Liabilities 600,000 x Revenue Earned Capital (600,000) * Expenses 600,000 x Net Income (600,000) * 0 0 (b) In 2020, the company's stock price is $24. If you were the Weaver Industries CEO, would you exercise your options? Explain. Because the stock price is per share, the Weaver CEO should exercise the options because she can immediately sell them for that amount. OBecause the stock price is per share, the Weaver CEO can immediately recognize a gain of $3 per share by exercising the options. Because the stock price is per share, no gain or loss would be recognized if the Weaver CEO exercises her options and immediately sold her shares. OBecause the stock price is per share, the options are under-water (out of the money) and the Weaver CEO should not exercise the options. (c) In 2022, the company's stock price is $46 and the CEO exercises all of her options. Use the financial statement effects template to record the exercise. Balance Sheet Income Statement Noncash Assets Transaction + + + Contributed Capital 4,600,000 x Cash Asset 2,700,000 Liabilities (1,800,000) * Revenue Earned Capital (100,000) * Expenses 100,000 x Net Income (100,000) x 2022 0 0 Identifying and Analyzing Financial Statement Effects of Share-Based Compensation Weaver Industries implements a new share-based compensation plan in 2017. Under the plan, the company's CEO and CFO each will receive non-qualified stock options to purchase 100,000, 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 $27 per share. Weaver uses the Black-Scholes model to estimate a fair-value per option of $18. (a) Use the financial statement effects template to record the compensation expense related to these options for each year 2017 through 2019. Use negative signs with answers, when appropriate. Balance Sheet Income Statement Noncash Assets Cash Asset + + + Contributed Capital 0 x Transaction Compensation expense recorded each year Liabilities 600,000 x Revenue Earned Capital (600,000) * Expenses 600,000 x Net Income (600,000) * 0 0 (b) In 2020, the company's stock price is $24. If you were the Weaver Industries CEO, would you exercise your options? Explain. Because the stock price is per share, the Weaver CEO should exercise the options because she can immediately sell them for that amount. OBecause the stock price is per share, the Weaver CEO can immediately recognize a gain of $3 per share by exercising the options. Because the stock price is per share, no gain or loss would be recognized if the Weaver CEO exercises her options and immediately sold her shares. OBecause the stock price is per share, the options are under-water (out of the money) and the Weaver CEO should not exercise the options. (c) In 2022, the company's stock price is $46 and the CEO exercises all of her options. Use the financial statement effects template to record the exercise. Balance Sheet Income Statement Noncash Assets Transaction + + + Contributed Capital 4,600,000 x Cash Asset 2,700,000 Liabilities (1,800,000) * Revenue Earned Capital (100,000) * Expenses 100,000 x Net Income (100,000) x 2022 0 0
