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Chapter 35
Share-based Payments (Part 2)

NAME: Date:
Professor: Section: Score:

QUIZ:

1. Many shares and most share options are not traded in an active market. Therefore, it is often
difficult to arrive at a fair value of the equity instruments being issued. Which of the following
option valuation techniques should not be used as a measure of fair value in the first instance?
a. Black-Scholes model.
b. Binomial model.
c. Monte-Carlo model.
d. Intrinsic value.

2. Elizabeth, a public limited company, has granted 100 share appreciation rights to each of its
1,000 employees in January 20X4. The management feels that as of December 31, 20X4, 90% of
the awards will vest on December 31, 20X6. The fair value of each share appreciation right on
December 31, 20X4, is P10. What is the fair value of the liability to be recorded in the financial
statements for the year ended December 31, 20X4?
a. P300,000
b. P10 million
c. P100,000
d. P90,000

3. On January 1, 2008, ABC Company offered its chief executive officer, stock appreciation rights
with the following terms:
Predetermined price ₱100 per share
Number of shares 10,000 shares
Service period-3 years 2008, 2009 and 2010
Exercise date December 31, 2010

The stock appreciation rights are exercised on December 31, 2010. The quoted price of the ABC stock
is as follows: ₱118 on December 31, 2008, ₱112 on December 31, 2009 and ₱124 on December 31,
2010. ABC Company should record 2010 compensation expense at
a. 160,000
b. 60,000
c. 80,000
d. 20,000

4. On January 1, 2006, Pencil Company granted Mr. Mongol Staedtler Rotring, its president, 5,000
stock appreciation rights for future services to be rendered. The rights are exercisable and expire
three years thereafter beginning December 31, 2007. On exercise, Rotring is entitled to receive
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cash for the excess of the market value of the stock on the exercise date over the market value on
the grant date. Rotring exercised all of the rights on December 31, 2007. The per share market
prices of Pencil’s stock were as follows:

January 1, 2006 ₱25

December 31, 2006 30
December 31, 2007 40

As a result of the stock rights, how much should Pencil recognize as compensation expense in 2007?
a. 62,500
b. 66,200
c. 68,500
d. 73,500

Use the following information for the next three questions:

On January 1, 20x1, PLUSH LUXORIOUS Co. granted 1,000 share appreciation rights (SARs) to
employees with the condition that the employees remain in service for the next three years.
Information on the SARs is shown below:
Date Number of SARs expected to vest Fair value of each SAR
Jan. 1. 20x1 1,000 40
Dec. 31, 20x1 900 48
Dec. 31, 20x2 800 60
Dec. 31, 20x3 750 64

All of the 750 SARs that vested were exercised on December 31, 20x3. The intrinsic value (which is
equal to the cash paid out) is equal to the fair value of the SARs of ₱64 on December 31, 20x3.

5. How much is the salaries expense recognized in 20x1?

a. 16,400 b. 14,400 c. 13,333 d. 0

6. How much is the accrued liability as of December 31, 20x2?

a. 19,000 b. 35,000 c. 32,000 d. 14,000

7. How much is the salaries expense recognized in 20x3?

a. 18,000 b. 12,400 c. 16,000 d. 0

8. Doc, a public limited company, has purchased inventory of P100,000. The company has offered
the supplier a choice of settlement alternatives. The alternatives are either receiving 1,000 shares
of Doc six months after the purchase date (valued at P110,000 at the date of purchase) or
receiving a cash payment equal to the fair value of 800 shares as of December 31, 20X4
(estimated value P90,000 at the date of purchase). What should be the accounting entry at the
date of purchase of the inventory?
a. Inventory P90,000, liability P90,000.
b. Inventory P100,000, liability P100,000.
c. Inventory P100,000, liability P110,000, intangible asset P10,000.
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d. Inventory P100,000, liability P90,000, equity P10,000.

Use the following information for the next two questions:

On January 1, 20x1, METTLE STRENGTH Co. issued share options to its employees. The fair value
of the share options on grant date is ₱2,000,000. The share options vest in three years. METTLE is
subject to a tax rate of 30% and is allowed a tax deduction for the intrinsic value of the share options.

9. If the intrinsic value of the share options on December 31, 20x1 is ₱1,600,000, how should
METTLE account for the tax effect of the share options?
a. recognize income tax benefit of ₱160,000 in profit or loss
b. recognize income tax benefit of ₱160,000 in equity
c. recognize income tax benefit of ₱133,336 in equity
d. recognize income tax benefit of ₱133,336 in profit or loss

10. If the intrinsic value of the share options on December 31, 20x1 is ₱2,400,000, how should
METTLE account for the tax effect of the share options?
a. recognize income tax benefit of ₱40,000 in profit or loss
b. recognize income tax benefit of ₱40,000 in equity
c. recognize income tax benefit of ₱166,667 in equity
d. recognize income tax benefit of ₱166,667 in profit or loss

“Therefore encourage one another and build each other up, just as in fact you are doing.” – (1 Thessalonians 5:11)

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