lOMoARcPSD|7110856 SOL. MAN. Chapter 12 Share Based Payments (PART 1) 2021 Intermediate Accounting 2 (Don Honorio Ventura Technological State University) StuDocu is not sponsored or endorsed by any college or university Downloaded by Alex Espere (alexresperejr@gmail.com) lOMoARcPSD|7110856 Page | 1 Chapter 12 Share-based Payments (Part 1) PROBLEM 1: TRUE OR FALSE 1. TRUE 2. TRUE 3. TRUE 4. TRUE 5. FALSE 6. FALSE 7. FALSE 8. TRUE 9. TRUE 10. TRUE PROBLEM 2: MULTIPLE CHOICE – THEORY 1. C 2. D 3. C 4. B 5. D 6. B 7. C 8. A 9. B 10. D 11. C 12. C 13. C 14. B 15. C – The addition of an exercise price (when supposedly the share options are exercisable for free) is not beneficial to the employee. Fogs Co. should ignore the repricing and continues to account for the grant under the original terms. PROBLEM 3: EXERCISES 1. Solution: May No entry 22, Downloaded by Alex Espere (alexresperejr@gmail.com) lOMoARcPSD|7110856 Page | 2 20x1 June 21, 20x1 Inventories (1,000 x 3,000) Subscribed share capital 3,000, 000 (10,000 x 200) Share premium (squeeze) July 5, 20x1 Subscribed share capital Share capital 2,000, 000 1,000, 000 2,000, 000 2,000, 000 2. Solution: Jan No entry . 1, 20 x1 De c. 31, 20 x1 De c. 31, 20 x2 De c. 31, 20 x3 Salaries expense – share options [(100 x 1,000) x 80% x 30 x 1/3] Share premium – sh. options outs. 800,0 00 Salaries expense – share options 740,0 00 [(100 – 15 – 3 -5) x 1,000 x 30 x 2/3] – 800K Share premium – sh. options outs. Salaries expense – share options [(100 – 15 – 3 -0) x 1,000 x 30 x 3/3] – 800K – 740K 920,0 00 Share premium – sh. options outs. 800,0 00 740,0 00 920,0 00 3. Solution: January 1, 20x1: No entry December 31, 20x1: Salaries expense [1,000 x (200 – 8) x 25 x 1/3)] 1,600,000 Share premium – options outstanding 1,600,000 December 31, 20x2: Salaries expense [1,000 x (200 – 8) x 25 x 2/3)] – 1.6M Share premium – options outstanding 1,600,000 Downloaded by Alex Espere (alexresperejr@gmail.com) 1,600,000 lOMoARcPSD|7110856 Page | 3 December 31, 20x3: Salaries expense 1,550,000 [1,000 x (200 – 6 – 1 - 3) x 25 x 3/3)] – 1.6M – 1.6M Share premium – options outstanding 1,550,000 PROBLEM 4: MULTIPLE CHOICE – COMPUTATIONAL 1. C January 1, 20x1: Salaries expense (5 x 1,000 x 60) 300,000 Share premium – options outstanding 300,000 NOTE: There are no vesting conditions. 2. C December 31, 20x1 Salaries expense [(10 -1 -1) x 500 x 60 x ½] Share premium – options outstanding 120,000 120,000 December 31, 20x2 Salaries expense [(10 -1) x 500 x 60 x 2/2] – 120K 150,000 Share premium – options outstanding 150,000 3. A December 31, 20x1: Salaries expense (3.2M x 90% x 1/3) Share premium – options outstanding December 31, 20x2: Salaries expense (3.2M x 96% x 2/3) – 960K Share premium – options outstanding 960,000 960,000 1,088,000 1,088,000 Cumulative share premium, Dec. 31, 20x2: (960,000 + 1,088,000) = 2,048,000 December 31, 20x3: Downloaded by Alex Espere (alexresperejr@gmail.com) lOMoARcPSD|7110856 Page | 4 Salaries expense [(3.2M x 100% x 3/3) – .96M – 1.088M] Share premium – options outstanding 1,152,000 1,152,000 4. B 20x1: (100 – 6 – 3) x 1,000 x 12 x 1/3 = 364,000 20x2: (100 – 8) x 1,000 x 12 x 2/3 – 364,000 = 372,000 20x3: (100 – 6 – 1 – 2) x 1,000 x 12 x 3/3 – 364K – 372K = 356,000 5. D - The share options vested in 20x2 because the average profit in 20x1 and 20x2 increased by more than 15% [(18% + 14%) ÷ 2 = 16%]. Consequently, no salaries expense is recognized in 20x3. 20x1: 1,000 x (100 – 5 – 6) x 45 x ½ = 2,002,500 20x2: 1,000 x (100 – 5 – 3) x 45 x 2/2 – 2,002,500 = 2,137,500 20x3: 0 6. A 20x1: (100 – 8 – 10) x 1,400 sh. (a) x 45 x 1/3 = 1,722,000 20x2: [(100 – 15) x 1,200 sh. (b) x 45 x 2/3] – 1.722M = 1,338,000 20x3: [(100 – 8 – 5 – 2) x 1,000 sh. (c) x 45 x 3/3] – 1.722M – 1.338M = 765,000 (a) (21% actual sales increase in 20x1 + 21% expected in 20x2 + 21% expected in 20x3) ÷ 3 = 21% (vesting condition iii) (b) (21% in 20x1 + 18% in 20x2 + 18% expected in 20x3) ÷ 3 = 19% (vesting condition ii) (c) (21% in 20x1 + 18% in 20x2 + 6% in 20x3) ÷ 3 = 15% (vesting condition i) 7. D (1,000 x 82 x 45) = 3,690,000 Downloaded by Alex Espere (alexresperejr@gmail.com) lOMoARcPSD|7110856 Page | 5 8. A 20x1: (100 x 92%) x 1,000 x 24 x 1/3 = 736,000 20x2: [(100 – 10) x 1,000 x 24 x 2/3] – 736,000 = 704,000 20x3: [(100 – 5 – 3 – 1) x 1,000 x 24 x 3/3] – 736K – 704K = 744,000 9. B 20x1: (100 – 6 – 3) x 1,000 x 12 x 1/3 = 364,000 20x2: [(100 – 6 - 1) x 1,000 x 12] – 364,000 = 752,000 10. D 20x1: (100 – 17 - 3) x 1,000 x 24 x 1/3 = 640,000 20x2: from original value: [(100 – 17 - 3) x 1,000 x 24 x 2/3] – 640,000 = 640,000 from incremental fair value: [(100 – 17 - 3) x 1,000 x (36 – 22) x 1/2] = 560,000 Total salaries expense in 20x2: (640,000 + 560,000) = 1,200,000 20x3: from original value: [(100 – 17 – 1 - 1) x 1,000 x 24 x 3/3] – 640,000 – 640,000 = 664,000 from incremental fair value: [(100 – 17 – 1 - 1) x 1,000 x (36 – 22) x 2/2] - 560,000 = 574,000 Total salaries expense in 20x3: (664,000 + 574,000) = 1,238,000 Cumulative share premium, Dec. 31, 20x3: (640,000 + 1,200,000 + 1,238,000) = 3,078,000 Reconciliation: Employees who remained until vesting date (100 - 17 - 1 - 1) No. of share options per employee No. of share options that actually vested Downloaded by Alex Espere (alexresperejr@gmail.com) 81 1,000 81,000 lOMoARcPSD|7110856 Page | 6 Fair value on Jan. 1, 20x1 Incremental fair value from repricing 2 4 1 4 38 3,078, 000 Total fair value Total salaries expense/share premium 11. C 20x1: (100 – 30 – 0) x 1,000 x 9 x 1/5 = 126,000; 20x2: [(100 – 30 – 40) x 1,000 x 9] x 2/3 – 126,000 = 54,000; 20x3: [(100 – 30 – 40 - 0) x 1,000 x 9] x 3/3 – 126,000 54,000 = 90,000 12. B Date 1.1.x1 12.31.x1 12.31.x2 12.31.x3 [100 x 1,000 x ₱9 x 1/5)] [(100 - 40) x 1,000 x ₱9 x 2/5)] – 180,000 Reversal of previously recognized amounts Salaries expense 180,000 36,000 (216,000) 13. C 20x1: (100 – 5) x 1,000 x 9 x 1/5 = 171,000; 20x2: [(100 – 1) x 1,000 x 9 x 2/5] – 171,000 = 185,400; [(100 – 1) x 1,000 x 10 x 1/4] = 247,500; Total salaries expense for 20x2: (185,400 + 247,500) = 432,900 14. D – 1,000 sh. opt. x (20 employees – 2 – 8) x ₱12 x 2/3* = 80,000 * The extension of the vesting period is ignored because it is not beneficial to the employee. November Rain Co. accounts for the grant under the original conditions. Downloaded by Alex Espere (alexresperejr@gmail.com) lOMoARcPSD|7110856 Page | 7 15. C Date 1.1.x1 12.31. x1 12.31. x2 12.31. x3 [10 x 1,000 x ₱30 x 1/3)] [(10 – 2) x 1,000 x ₱30)] – 100,000 Salari es expen se 100,0 00 140,0 00 Cumulative salaries expenses 100,000 240,000 - - The salaries expenses that would have been recognized in 20x2 and 20x3 are simply recognized immediately on Dec. 31, 20x2. PROBLEM 5: FOR CLASSROOM DISCUSSION 1. Solution: May. 21, 20x1 July 5, 20x1 No entry Equipment (cash selling price) Subscribed capital (10,000 x 2,000, 000 ₱100) Share premium July 21, 20x1 Subscribed capital Share capital 1,000, 000 1,000, 000 1,000, 000 1,000, 000 2. Solution: May. 21, 20x1 July 5, 20x1 No entry Equipment (10,000 x ₱192) Subscribed capital (10,000 x 1,920, 000 ₱100) Share premium July 21, 20x1 Subscribed capital Share capital 1,000, 000 Downloaded by Alex Espere (alexresperejr@gmail.com) 1,000, 000 920,00 0 1,000, 000 lOMoARcPSD|7110856 Page | 8 3. Solution: Jan. Salaries expense (1,000 x 10 x ₱50) 1, Share premium - sh. options 20x outstanding 1 500,0 00 500,0 00 4. Solution: Jan . 1, 20x 1 De c. 31, 20x 1 De c. 31, 20x 2 De c. 31, 20x 3 Memo entry Salaries expense – share options (10 – 3) x 1,000 x 21 x 1/3 Share premium – sh. options outstanding Salaries expense – share options [(10 – 2 – 1 - 1) x 1,000 x 21 x 2/3] – 49,000 Share premium – sh. options outstanding Salaries expense – share options [(10 - 2 - 1 - 0) x 1,000 x 21 x 3/3] 49K - 35K Share premium – sh. options outstanding 49,00 0 49,00 0 35,00 0 35,00 0 63,00 0 63,00 0 5. Solution: Jan . 1, 20 x1 De c. 31, 20 x1 De c. 31, 20 x2 De c. 31, Memo entry Salaries expense – share options (10 – 1 - 2) x 1,000 x 21 x 1/3 Share premium – sh. options outstanding Salaries expense – share options [(10 – 1 – 0 - 2) x 1,000 x 21 x 2/3] – 49,000 Share premium – sh. options outstanding Salaries expense – share options [(10 – 1 – 0 - 1) x 1,000 x 71(a) x 3/3] – 49K – 49K 49,00 0 49,00 0 49,00 0 49,00 0 470,0 00 Downloaded by Alex Espere (alexresperejr@gmail.com) lOMoARcPSD|7110856 Page | 9 20 x3 Share premium – sh. options outstanding 470,0 00 (a) [(18% + 19% + 23%) ÷ 3] = 20% average increase. Therefore, the exercise price decreases to ₱50 and the fair value per share option increases to ₱70. 6. Solution: Jan . 1, 20x 1 De c. 31, 20x 1 De c. 31, 20x 2 De c. 31, 20x 3 Memo entry Salaries expense – share options (10 – 1 - 1) x 1,000 x 21 x 1/3 Share premium – sh. options outstanding Salaries expense – share options [(10 – 3) x 1,000 x 21 x 2/3] – 56,000 Share premium – sh. options outstanding Salaries expense – share options [(10 – 1 – 1 - 0) x 1,000 x 21 x 3/3] – 56K – 42K 56,00 0 56,00 0 42,00 0 42,00 0 70,00 0 70,00 0 Share premium – sh. options outstanding NOTE: Because the share price target is a market condition, it makes no difference whether it is achieved. The salaries expenses as computed are nonetheless recognized. The reason for this is that the fair value estimate has already taken into account the possibility that the share price target will not be achieved. 7. Solution: Jan . 1, 20 x1 De c. 31, 20 x1 De c. 31, Memo entry Salaries expense – share options (10 – 1 - 2) x 1,000 x 21 x 1/3 Share premium – sh. options outstanding Salaries expense – share options Share premium – sh. options outstanding 49,00 0 49,00 0 63,00 0(a) Downloaded by Alex Espere (alexresperejr@gmail.com) 63,00 lOMoARcPSD|7110856 P a g e | 10 20 x2 De c. 31, 20 x3 (a) 0(a) Salaries expense – share options Share premium – sh. options outstanding 88,00 0(b) 88,00 0(b) The salaries expense in 20x2 is computed as follows: Salaries expense on original value of equity instruments granted: [(10 – 3) x 1,000 x 21 x 2/3] – 49,000 49,000 Salaries expense on incremental fair value from repricing: (10 – 3) x 1,000 x (₱12 - ₱8) x 1/2* 14,000 Salaries expense in 20x2 63,000 * 20x2 and 20x3 (b) The salaries expense in 20x3 is computed as follows: Salaries expense on original value of equity instruments granted: [(10 – 1 – 1 - 0) x 1,000 x 21 x 3/3] – 49,000 – 70,000 49,000 Salaries expense on incremental fair value from repricing: [(10 – 1 – 1 - 0) x 1,000 x (₱12 - ₱8) x 2/2] – 18,000 14,000 Salaries expense in 20x3 88,000 8. Solution: Jan . 1, 20x 1 De c. 31, 20x 1 De c. 31, 20x 2 Memo entry Salaries expense – share options (10 – 1 - 2) x 1,000 x 21 x 1/3 Share premium – sh. options outstanding Salaries expense – share options [(10 – 3) x 1,000 x 21 x 2/3] – 49,000 Share premium – sh. options outstanding 49,00 0 49,00 0 49,00 0 Downloaded by Alex Espere (alexresperejr@gmail.com) 49,00 0 lOMoARcPSD|7110856 P a g e | 11 De c. 31, 20x 3 Salaries expense – share options [(10 – 1 – 1 - 0) x 1,000 x 21 x 3/3] – 49K – 49K 70,00 0 70,00 0 Share premium – sh. options outstanding NOTE: The modification is ignored because adding an exercise price, when originally there was none (i.e., free), is not beneficial to the employee (this is also evidenced by the decrease in the fair value per share option). The grant is accounted for under the original conditions. 9. Solution: Jan . 1, 20 x1 De c. 31, 20 x1 De c. 31, 20 x2 10. Memo entry Salaries expense – share options (10 – 0) x 1,000 x 21 x 1/3 Share premium – sh. options outstanding Salaries expense – share options [(10 – 1) x 1,000 x 21] – 70,000 Share premium – sh. options outstanding 70,00 0 70,00 0 119,0 00 119,0 00 Solution: Jan . 1, 20x 1 De c. 31, 20x 1 De c. 31, 20x 2 Salaries expense – share options [10 x 1,000 x 70% x (41 – 20) x 1/3] Share premium – sh. options outstanding Salaries expense – share options De c. 31, 20x 3 [(10 – 2 – 0 – 2) x 1,000 x (42 – 20) x 3/3] – 49K – 35K Memo entry [(10 – 2 – 0 – 1) x 1,000 x (38 – 20) x 2/3] – 49K Share premium – sh. options outstanding Salaries expense – share options 49,00 0 49,00 0 35,00 0 48,00 0 Share premium – sh. options Downloaded by Alex Espere (alexresperejr@gmail.com) 35,00 0 48,00 0 lOMoARcPSD|7110856 P a g e | 12 outstanding Downloaded by Alex Espere (alexresperejr@gmail.com)