Week 5 - Employee Benefits

Question 1

Employee Benefits: Where to debit and credit?

Answer 1

Dr Wages & Salaries Expense (P&L)
Cr Accruals (current liabilities SoFP)

Question 2

Firm commits 10% of salary & commisions (£5.5m) into pension plan

Have paid £400k so far, show the accounting for the year

Answer 2

£550k Income statement expense

150k (550k-400k) in current liabilities (SoFP)

Question 3

Accounting for share options

On 1 January 20X0 (the grant date) DL plc grants 10,000 share options to its chief executive, Lilian, with an exercise price of 800p. The options vest in three years’ time (on 31/12/X2) as long as Lilian is still in
employment at DL plc. DL plc have used an option pricing model at the grant date, which has suggested the options have a fair value of 210p. The shares have a nominal value of £1 and a market value of 850p
on 31/12/X2.
Assuming
* Lillian stays in employment throughout the vesting period
* Lillian exercises all of her options on 31/12/X2
Show the accounting entries related to the share options in DL plc’s financial statements from 1/1/X0 to 31/12/X2

Answer 3

1st year:
10,000 options x fair value 210p = £21,000 x 1/3* = £7,000
Dr Income Statement Expense £7,000 Cr Equity £7,000
*as 1/3 of vesting period has elapsed

Year ended 31/12/X1
10,000 options x fair value 210p = £21,000 x 1/3* = £7,000
Dr Income Statement Expense £7,000 Cr Equity £7,000
In the SOFP equity balance is now £14,000

Year ended 31/12/X2
10,000 options x fair value 210p = £21,000 x 1/3* = £7,000
Dr Income Statement Expense £7,000 Cr Equity £7,000
Lillian exercises her options – so she pays 800p x 10,000 = £80,000 to DL plc
Dr Cash £80,000 Cr Share Capital (10,000 x £1) £10,000 Cr Share Premium £70,000
The share option reserve accumulated of £21,000 can also be released (most likely to Retained Earnings)

Would answer change if share price was 750p in 3 years? We would assume options aren’t exercised (as they are out of the money)