At its annual meeting in June 2016, the shareholders of Rusylvia Ltd. (Rusylvia) approved a plan allowing the company's board of directors to grant stock options to certain employees as part of their com pensation packages. During the year ended March 31, 2017, the board granted 200,000 options to its senior executives. The stock options were issued when Rusylvia's shares had a market price of $10 per share. The exercise price of the options is $10.25 per share.
During fiscal 2017, Rusylvia earned revenues of $34,500,000, and had cost of sales of $15,200,000; selling, general, and administrative expenses of $4,800,000; interest expense of $3,500,000; other expenses of $5,900,000; and an income tax expense of $1,220,000. The estimated value of the stock options when they were issued was $1,800,000.
On March 31, 2016, the equity section showed the following:
Preferred shares (unlimited number authorized; 400,000 outstanding,
$3 annual dividend, cumulative)............... $16,000,000
Common shares (unlimited number authorized; 8,000,000 outstanding). 9,000,000
Retained earnings....................... 14,850,000
In March 2017, Rusylvia declared and paid the dividend on the preferred shares and declared and paid a cash dividend of $0.25 per share on the common shares.

a. Prepare Rusylvia's income statement for the year ended March 31, 2017,
i. Assuming that the options are expensed.
ii. Assuming that the options aren't expensed.
b. Calculate basic earnings per share and return on shareholders' equity, assuming both that the value of the stock options is expensed when granted, and assuming it isn't expensed.
c. What effect do the two treatments for employee stock options have on cash flow?
d. Which accounting approach do you think Rusylvia's managers would prefer?
e. Which approach do you think gives a better representation of Rusylvia's economic performance?
f. If Rusylvia didn't accrue the cost of the options in its financial statements, what information would you want disclosed about them? Explain.

  • CreatedFebruary 26, 2015
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