INTERMEDIATE ACCOUNTING IV

NAME: ________________________________________ Date:______________

SECTION: ____________________________

Put the letter of the correct answer.

______1. These are transactions in which the entity receives goods or services as consideration for
equity instruments of the entity, including shares and share options.
a. Equity settled share-based payment transactions
b. Cash settled share-based payment transactions
c. Equity payment transactions
d. Cash payment transactions

______2. It Is a contract that gives the holder the right, but not the obligation. To subscribe to the
entity’s shares at a fixed or determinable price for a specified period of time.
a. share option
b. share appreciation rights
c. share split
d. share warrant.

______3. The date on which to measure the compensation element in a stock option granted to a
corporate employee ordinarily is the date on which the employee
a. is granted the option.
b. has performed all conditions precedent to exercising the option.
c. may first exercise the option.
d. exercises the option.

______4. Compensation expense resulting from a compensatory stock option plan is generally

a. recognized in the period of exercise.

b. recognized in the period of the grant.
c. allocated to the periods benefited by the employee's required service.
d. allocated over the periods of the employee's service life to retirement

_______5. The date on which total compensation expense is computed in a stock option plan is the date

a. of grant.
b. of exercise.
c. that the market price coincides with the option price.
d. that the market price exceeds the option price

______6. On January 1, 2022, Trent Company granted Dick Williams, an employee, an option to buy
300 shares of Trent Co. stock for P30 per share, the option exercisable for 5 years from date of grant.
Using a fair value option pricing model, total compensation expense is determined to be P2,700.
Williams exercised his option on September 1, 2022, and sold his 300 shares on December 1, 2022.
Quoted market prices of Trent Co. stock during 2022 were:
January 1 P30 per share
September 1 P36 per share
December 1 P40 per share
The service period is for two years beginning January 1, 2022. As a result of the option granted to
Williams, using the fair value method, Trent should recognize compensation expense for 2022 on its
books in the amount of
a. P3,000.
b. P2,700. Total compensation = P2,700/2 years
c. P1,350.
d. P0. = 1,350
 ________7. In order to retain certain key executives, Smiley Corporation granted them incentive stock
options on December 31, 2011. 100,000 options were granted at an option price of P35 per share.
Market prices of the stock were as follows:

December 31, 2012 P46 per share

December 31, 2013 51 per share
The options were granted as compensation for executives’ services to be rendered over a
two-year period beginning January 1, 2012. The Black-Scholes option pricing model
determines total compensation expense to be P1,000,000. What amount of compensation
expense should Smiley recognize as a result of this plan for the year ended December 31,
2012 under the fair value method?
a. P1,750,000.
Total compensation = P1,000,000/2 years
b. P1,100,000.
c. P1,000,000.
= 500,000
d. P500,000

Activity 1 (Adapted). At this point, let us to determine the extent of your

understanding
on the share-based payment transactions of the entity. Encircle the letter that
corresponds to your answer.
1.) T
II. COMPREHENSIVE

On January 1, 2020, to supplement salaries of executives, Grazilda Company issued share options to
executives to purchase 40,000 ordinary shares of P100 par value at 125 per share.

On such date, the market value of ordinary share is P150 per share. The fair value of each share option is
P30.

The share options are exercisable starting January 1, 2022 and expire one year after.

Options covering the remaining 35,000 shares are exercised on January 15, 2022. Options covering the
remaining shares expired

A. Compute the compensation expense for:

2020: _________________________

2021: _________________________

2022: _________________________

B. Prepare the journal entries to record the compensation each year as well as the exercise and expiration
of the share options:
Year 2021
Granted shares = 40,000 40,000 x 30 = 1,200,000 -600,000
Option
: price = P125 = 600,000
FV of share option = P30
Vesting period = 2years Salaries – share options 600,0000
Share option outstanding 600,000
Year 2020
40,000 x 30 = 1,200,000/ 2 years
= 600,000 Entries upon exercise and expiration expiration

Salaries – share options 600,0000 Cash (35,000 x125) 4,375,000

Share option outstanding 600,000 SO outstanding (35,000 x30) 1,050,000
Ordinary shares capital (35,000 x100) 3,500,000
Share premium 1,925,000