Share options

Page 394
Problem 28-1
In connection with share option plan for the benefit of key employees, Ward Company
intends to distribute treasury shares when the options are exercised. These shares
were previously bought at P42 per share. The par value per share is P30.

On January 1, 2019, the entity granted share options of 100,000 shares at an option
price of P38 per share as additional compensation for services to be rendered over the
next three years.

The options are exercisable during a 2-year period beginning January 1, 2022, by
grantee still employed by at the entity.

Market price of share was P37 at the grant date.

The fair value of the share option is P12 on grant date. All share options were exercised
during 2022.

1) What amount should be reported as compensation expense for 2019?

a) 600,000
b) 400,000
c) 300,000
d) 450,000

2) What amount should be recognized as share premium upon exercise of the share
options in 2022?
a) 2,000,000
b) 1,200,000
c) 800,000
d) 0

Page 396
Problem 28-2
On January 1, 2019, Oak Company granted share options to certain key employees as
additional compensation.

The options were for 100,000 ordinary shares of P10 par value at an option price of P15
per share.

Market price of this share on January 1, 2019 was P20. The fair value of each share
option on January 1, 2019 is P8.

The options were exercisable immediately beginning January 1, 2019 and expire on
December 31, 2020. On December 31, 2019, all share options were exercised.
1) What amount of compensation expense should be reported in 2019?
a) 800,000
b) 500,000
c) 200,000
d) 1250,000

2) What amount should be recognized as share premium upon exercise of the share
options on December 31, 2019?
a) 1,300,000
b) 1,000,000
c) 500,000
d) 900,000

Page 397
Problem 28-3
On June 30, 2019, Newman Company granted compensatory share options for 30,000
P20 par value ordinary shares to certain key employees. The market price of the share
on that date was P36 and the option price was P30.

The Black-Scholes option price model measure the total compensation expense to be
P5,400,000.

The options are exercisable beginning January 1, 2022, provided the key employees
are still in entity’s employ at the time the options are exercised. The options expire on
June 30, 2023.

On January 15, 2022, when the market price of the share was P42, all 30,000 options
were exercised/

1) What amount should be reported as compensation expense for 2021?

a) 2,160,000
b) 1,080,000
c) 5,400,000
d) 2,700,000

2) What amount should be recognized as share premium upon exercise of share

options in 2022?
a) 5,400,000
b) 5,700,000
c) 4,620,000
d) 300,000

Page 398
Problem 28-4
On January 1, 2019, Kine Company granted MORgan, the president, compensatory
share options to buy 10,000 ordinary shares of P10 par value.
The options call for a price of P20 per share and are exercisable in 3 years following
the grant date. Morgan exercised the options on December 31, 2019.

The market price of the share was P60 on January 1, 2019, and P70 on December 31,
2019. The fair value of the share options in P30 on the date of grant.

What is the net increase in shareholders’ equity as a result of the grant and exercise of
the options?
a) 200,000
b) 300,000
c) 500,000
d) 700,000

Page 399
Problem 28-5
On January 1, 2019, Kamagong Company granted 100 share options each to 500
employees, conditional upon the employee’s remaining in the entity’s employ during the
vesting period.

The share options vest at the end of a three-year period. On grant date, each share
option has a fair value of P30.

The par value per share is P100 and the option price is P120.

On December 31, 2020, 30 employees have left and it is expected that on the basis of a
weighted average probability, a further 30 employees will leave before the end of the
three-year period.

On December 31, 2021, only 20 employees actually left and all of the share options are
exercised on such date.

1) What amount should be reported as compensation expense for 2019?

a) 750,000
b) 500,000
c) 250,000
d) 400,000

2) What amount should be reported as compensation expense for 2020?

a) 880,000
b) 380,000
c) 440,000
d) 300,000

3) What amount should be reported as compensation expense for 2021?

a) 500,000
b) 880,000
c) 380,000
d) 470,000

4) What amount should be reported as share premium upon exercise of the share
options on December 31, 2021?
a) 1,370,000
b) 2,250,000
c) 1,350,000
d) 900,000

Page 401
Problem 28-6
On January 1, 2019, Paranoid Company granted to a senior executive 30,000 share
options, conditional upon the executive’s remaining in the entity’s employ until
December 31, 2021.

The par value per share is P50. The exercise price is P100.

However, the exercise price drops to P80 if the entity’s earnings increase by at least an
average of 10% per year over the three-year period.

On the grant date, the entity estimated that the fair value of the share option is P30 if
the exercise price is P80.

If the exercise price is P100, the fair value of the share option is P25.

During 2019 and 2020, the earnings increased by 11% and 12% respectively. However,
during 2021, the earnings increased only by 4%

All share options were exercised on December 31, 2021.

1) What amount should be recognized as compensation expense in 2021?

a) 300,000
b) 600,000
c) 150,000
d) 750,000

2) What amount should be recorded as share premium upon exercise of the share
options on December 31, 2021?
a) 1,500,000
b) 2,400,000
c) 2,250,000
d) 1,650,000
Page 403
Problem 28-7
On January 1, 2019, Nova Company granted share options to each of the 300
employees working in the sales department.

The share options vest at the end of a three-year period provided that the employees
remain in the entity’s employ and provided the volume of sales will increase by more
than 10% per year. The fair value of each share option on grant date is P30.

The par value per share is P50 and the option price is P60.

If the sales increase by more than 10%, each employee will receive 200 share options.

If the sales increase by more than 15%, each employee will receive 300 share options.

On December 31, 2019, the sales increased by more than 10% but not more than 15%,
and no employees have left the entity.

On December 31, 2020, sales increased by more than 15% and no employees have
left.

On December 31, 2021, the sales increased by more than 15% and 50 employees have
left the entity.

All of the share options were exercised on December 31, 2021.

1) What amount should be recognized as compensation expense for 2021?

a) 1,200,000
b) 2,250,000
c) 900,000
d) 450,000

2) What amount should be recognized as share premium upon exercise of share option
on December 31, 2021?
a) 3,150,000
b)3,000,000
c) 900,000
d) 750,000

Page 405
Problem 28-8
On January 1, 2019, Vicar Company initiated a performance-based employee share
option plan. The performance base for the plan is net sales in 2021.

The plan provided for share options to be awarded to the employees as a group on the
following basis:
Level Net sales range Options granted
1 Less than 2,500,000 10,000
2 P2,500,000 – 4,999,999 20,000
3 P5,000,000 – 10,000,000 30,000
4 More than 10,000,000 40,000

The options become exercisable on January 1, 2022, The options were exercised on
December 31, 2022.

The option exercise price is P200 per share and the par value is P100 per share.

On January 1, 2019, each option had a fair value of P90.

The share market prices on selected dates in 2019-2021 were:

January 1, 2019 250
December 31, 2019 300
December 31, 2020 350
December 31, 2021 320

Sales each year were:

2019 4,500,000
2020 5,500,000
2021 7,000,000

1) What amount should be reported as compensation expense for 2019?

a) 450,000
b) 900,000
c) 600,000
d) 300,000

2) What amount should be reported as compensation expense for 2020?

a) 2,700,000
b) 1,200,000
c) 1,800,000
d) 1,500,000

3) What amount should be reported as compensation expense for 2021?

a) 1,200,000
b) 1,800,000
c) 600,000
d) 900,000

4) What amount should be credited to share premium upon exercise of the share
options on December 31, 2022?
a) 5,700,000
b) 2,700,000
c) 3,000,000
d) 4,200,000

Page 408
Problem 28-9
Rose Company granted 150,000 share options to employees with a fair value of
P6,000,000. The options vest in three years and exercisable within two years from
vesting date.

The Monte Carlo model was used to value the options. The options price is P80 per
share and the par value is P50.

On January 1, 2019, which is the date of grant the estimate of employees leaving the
entity during the vesting period is 5%

On December 31, 2020, the estimate of employees leaving before vesting date is
revised to 6%.

On December 31, 2021, only 5% of the employees actually left the entity.

On December 31, 2022, the employees exercised 100,000 share options when the
market value is P150 per share.

1) What amount should be reported as compensation expense for 2019?

a) 1,900,000
b) 2,000,000
c) 1,200,000
d) 2,850,000

2) What amount should be reported as compensation expense for 2020?

a) 3,760,000
b) 1,860,000
c) 1,504,000
d) 1,880,000

3) What amount should be reported as compensation expense for 2021?

a) 2,000,000
b) 1,900,000
c) 1,880,000
d) 1,940,000

4) What amount of share premium should be credited upon exercise of the share
options on December 31, 2022?
a) 3,000,000
b) 4,000,000
c) 7,000,000
d) 0

Page 410
Problem 28-10
Roxanne Company has granted share options to the employees. The total
compensation expense to the vesting date of December 31, 2022 has been calculated
at P8,000,000

The entity has decided to settle the award early on December 31, 2021.

The compensation expense charged since the date of grant on January1, 2019 and
P2,100,000 for 2020.

The compensation expense that would have been charged in 2021 was P2,200,000.

1) What amount should be reported as compensation expense for 2021?

a) 2,200,000
b) 8,000,000
c) 3,900,000
d) 2,000,000

2) What amount should be reported as compensation expense for 2021 if the share
options are not exercised but instead the entity paid P7,500,000 to the employees?
a) 2,200,000
b) 3,900,000
c) 3,400,000
d) 7,500,000

Page 412
Problem 28-11
On January 1, 2019, Alterra Company granted 60,000 share options to employees. The
share options will vest at the end of three years provided the employees remain in
service until then. The options price is P60 and the par value per share is P50.

At the date of grant, entity concluded that the fair value of the share options cannot
be measured reliably.

The share options have a life of 4 years which means that the share options can be
exercised within one year after vesting.

The share prices are P62 on December 31, 2019, P66 on December 31, 2020, P75 on
December 31, 2021 and P85 on December 31, 2022.

All share options were exercised on December 31, 2022.

1) What amount should be reported as compensation expense for 2019?
a) 120,000
b) 60,000
c) 40,000
d) 30,000

2) What amount should be reported as compensation expense for 2020?

a) 360,000
b) 240,000
c) 200,000
d) 180,000

3) What amount should be reported as compensation expense for 2021?

a) 900,000
b) 300,000
c) 450,000
d) 660,000

4) What amount should be reported as compensation expense for 2022?

a) 500,000
b) 375,000
c) 600,000
d) 0

Page 414
Problem 28-12
On January 1, 2019, Easy Company granted 30,000 share options to employees.

The share options vest at the end of three years provided the employees remain in
service until then.

The option price is P60 and the share price is also P60 at the date of grant. The par
value of the share is P50.

At the date of grant, the entity concluded that the fair value of the share options
cannot be estimated reliably.

The share options have a life of 6 years. This means that the options can be exercised
within three years after vesting.

All share options vested at the end of three years and no employees left during the
three-year period.

The share prices and the number of share options exercised are set out below.
Share price Share options exercised at year-end
2019 63
2020 66
2021 75
2022 88 10,000
2023 100 15,000
2024 90 5,000

Required:
Determine the compensation expense for each year from 2019 to 2024 using the
intrinsic value method.