On 1 July 2021 Polly Ltd grants 300 options to each of its 100 employees conditional on the employee remaining in service over the next three years. The fair value of each option is estimated to be $12. Polly estimates that 15 employees will leave over the three year vesting period. By 30 June 2022 four employees have left and the entity estimates that a further ten employees will leave over the next two years.
On 30 June 2022 Polly decided to reprice its share options, due to a fall in its share price over the last 12 months. The repriced share options will vest on 30 June 2024. At the date of repricing, Polly estimates that the fair value of each original option is $3 and the fair value of each repriced option is $5.
During the year ended 30 June 2023 a further 6 employees leave and Polly estimates that another 3 employees will leave during the year ended 30 June 2024.
During the year ended 30 June 2024 four employees left. The entry at 30 June 2023 to account for the share based payment transaction is:
A) DR Wages expense; CR Cash
B) DR Wages expense; CR Options issued (equity)
C) DR Wages expense; CR Share capital
D) DR Wages expense; CR Liability to employee

Question

Quizplus · Accepted Answer

The entry at 30 June 2023 to account for the share-based payment transaction is to recognize the expense related to the options granted. As per the given information, the fair value of each option is estimated to be $12 at the grant date, and Polly estimates that 10 employees will leave over the next two years. Therefore, the total number of options granted is 100 x 300 = 30,000, and the total number of options expected to vest is 30,000 - 4 - 10 - 6 - 3 - 4 = 30,000 - 27 = 2,973.

The expense recognized is calculated as follows:
Fair value per option at grant date = $12
Expected number of options to vest = 2,973
Total expense = $12 x 2,973 = $35,676

Therefore, the journal entry to recognize the expense would be:
DR Wages expense $35,676
CR Options issued (equity) $35,676

On 1 July 2021 Polly Ltd Grants 300 Options to Each