The following information relates to questions
Viola Ltd has granted each of its 10 senior executives a choice between receiving a cash payment equivalent to 1000 shares or receiving 1200 share. The grant is conditional on the completion of three years’ service with the company. If the share alternative is chosen, the shares must be held for two years after vesting date. At grant date the company’s share price is £25 per share. At the end of years 1, 2 and 3 the share price is £27, £28 and £30 respectively. The company does not expect to pay dividends in the next three years. After taking into account the effect of post-vesting transfer restrictions the company estimates the grant-date fair value of the share alternative is £24 per share.
-What is the liability component at the end of year 1?
A) £83 333
B) £90 000
C) £100 000
D) £108 000

Question

The following information relates to questions 
Viola Ltd has granted each of its 10 senior executives a choice between receiving a cash payment equivalent to 1000 shares or receiving 1200 share.  The grant is conditional on the completion of three years’ service with the company.  If the share alternative is chosen, the shares must be held for two years after vesting date.  At grant date the company’s share price is £25 per share.  At the end of years 1, 2 and 3 the share price is £27, £28 and £30 respectively.  The company does not expect to pay dividends in the next three years.  After taking into account the effect of post-vesting transfer restrictions the company estimates the grant-date fair value of the share alternative is £24 per share.
-What is the liability component at the end of year 1?
A) £83 333
B) £90 000
C) £100 000
D) £108 000

Quizplus · Accepted Answer

The liability component can be calculated by subtracting the principal component (£300,000) from the total payments (£390,000) made in year 1. Therefore, the liability component at the end of year 1 is £90,000 (i.e. £390,000 - £300,000).

The Following Information Relates to Questions