GENSANTOS FOUNDATION COLLEGE, INC.

Bulaong Extension, General Santos City 9500
BSA/BSMA Department
AUDITING PROBLEMS E.J. SEBUA, CPA
AUDIT OF SHAREHOLDER’S EQUITY – SHARE BASED PAYMENTS
Problem 1 – No vesting period
On January 1, 2013, share options are granted to employees to purchase 100,000 ordinary shares of P50 par value at
P60 per share. On this date, the fair value of each share option is P20. The options are exercisable immediately. The
employees exercised all their share options on December 31, 2013. Provide all necessary journal entries.

Problem 2 – With vesting period

On January 1, 2013, share options are granted to officers to purchase 100,000 ordinary shares of P50 par value at P60
per share. The fair value of each share option is P15. The officers are entitled to the share options only after completing
two years of service from the date of grant. The options can be exercised starting January 1, 2015 and expire one year
after. All share options are exercised on December 31, 2015. Provide all necessary journal entries.

Problem 3 – With vesting period; some employees left

On January 1, 2013, an entity 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 the three-year period.
On grant date, each share option has a fair value of P30.
By December 31, 2013, 30 employees left and it is expected that on the basis of weighted average probability, a further
30 employees will leave during the vesting period.
By December 31, 2014, 28 employees have left and the entity expects that a further 25 employees will leave during
2015.
By December 31, 2015, 22 employees have left and therefore, 420 employees shall receive share options at the end of
2015.
Compute for the compensation expense for each year of the three-year vesting period.

Problem 4 – With condition and share options vary

On January 1, 2013, an entity granted share options to each of its 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 an average of 10% per year. The fair value of each share option on grant
date is P20.
If the sales increase by an average of 10%, each employee will receive 200 share options. If the sales increase by an
average of 15% per year, each employee will receive 300 share options.
During 2013, the sales increased by 10% and the entity expects this rate of increase to continue in the next two years.
During 2014, the sales increased by 20% resulting in an average of 15% for the two years to date.
During 2015, the sales increased by an average of 16% over three years. By the end of 2015, 20 employees left the
entity.
Compute for the compensation expense for each year of the three-year vesting period.

Problem 5 – With condition and exercise price varies

On January 1, 2013, an entity granted to a senior executive 20,000 share options, conditional upon the executive’s
remaining in the entity’s employ until December 31, 2015. 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.

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         GENSANTOS FOUNDATION COLLEGE, INC.
Bulaong Extension, General Santos City 9500
BSA/BSMA Department
AUDITING PROBLEMS E.J. SEBUA, CPA
On grant date, the entity estimates 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 2013 and 2014, the earnings increased by 12% and 11% respectively. However, during 2015, the earnings
increased by only 4%.
Compute for the compensation expense for each year of the three-year vesting period.

Problem 6 – Intrinsic value method

On January 1, 2013, an entity granted 10,000 share options to employees. The share options vest on December 31, 2014
provided the employees remain in service until then.
The fair value of the share option cannot be estimated reliably. The par value per ordinary share is P100. The option
price is P125. And the market value of the ordinary share is also P125 at the date of grant. All share options vested on
December 31, 2014 and no employees left the entity.
The share options can be exercised starting January 1, 2015 and expire two years after. All share options are exercised
on December 31, 2015. The share market price are P150 on December 31, 2013, P180 on December 31, 2014 and P200
on December 31, 2015.
Compute for the compensation expense for each year of the three-year vesting period.

Problem 7 – Acceleration of vesting

On January 1, 2013, an entity granted 50,000 share options to its employees. The option price is P60 and the par value of
each share is P50. The vesting period is 4 years. The fair value of the share options or total compensation expense to the
vesting date on December 31, 2016 has been calculated at P4,000,000. The entity has decided to settle the award early
on December 31, 2015. The compensation expense charged in the income statement since the date of grant on January
1, 2013 is as follows:
2013 P1,000,000
2014 1,050,000
Compute for the compensation expense for each year of the three-year vesting period.

Problem 8 – Share appreciation rights

An entity granted a share appreciation right to the general manager on January 1, 2013.
After a four-year service period, the employee is entitled to receive cash equal to the appreciation in share price over
the market value on January 1, 2013.
The share appreciation right had the ff. terms:
a) Service period – January 1, 2013 to December 31, 2016
b) Number of shares – 20,000 shares
c) Exercise date – January 1, 2017
The quoted prices of the entity shares are:
a) January 1, 2013 – P200
b) December 31, 2013 – P210
c) December 31, 2014 – P220
d) December 31, 2015 – P240
e) December 31, 2016 – P250
Provide all necessary journal entries.

Problem 9 – SARs with intrinsic values

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         GENSANTOS FOUNDATION COLLEGE, INC.
Bulaong Extension, General Santos City 9500
BSA/BSMA Department
AUDITING PROBLEMS E.J. SEBUA, CPA
On January 1, 2013, Module Company granted 100 share appreciation rights to each of the 500 employees on condition
that the employees remain in the employ of the entity for the next three years. No employees left the entity during the
three-year vesting period.
The employees exercised their share appreciation rights as follows:
December 31, 2015 100 employees
December 31, 2016 250 employees
December 31, 2017 150 employees

The fair value and intrinsic values of the share appreciation rights are as follows:
Fair value Intrinsic value
December 31, 2013 15
December 31, 2014 18
December 31, 2015 20 15
December 31, 2016 21 20
December 31, 2017 25

Provide all necessary journal entries.

Problem 10 – Cash and share alternative

On January 1, 2013, an entity granted to an employee the right to choose either:
a) 12,000 shares
b) Cash payment equal to market value of 10,000 phantom shares
The grant is conditional upon the completion of three years of service. If the employee chooses the share alternative,
the shares must be held for three years after the vesting date.
The par value of shares is P25 and at grant date on January 1, 2013, the share price is P51.
The share prices for the three-year vesting period are P54 on December 31, 2013, P60 on December 31, 2014 and P65
on December 31, 2015.
After taking into account the effects of post-vesting restrictions, the entity has estimated that the fair value of the share
alternative is P48 per share.
Provide all necessary journal entries.

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