ACT1106

Midterm Period Quiz No. 4

Problem 1
You were able to gather the following information in connection with the examination of Pau Corporation:
 On January 1, 2021, Pau Corporation granted share options to officers and key employees for the purchase of
30,000, Php10 par value, ordinary shares of the company at Php25 per share. The options are exercisable
within a 5-year period beginning January 1, 2023 by grantees still in the employ of the company, and expiring
December 31, 2027. The service period for this award is 2 years. The fair value option pricing model
determined total compensation expense to be Php525,000. The share was selling at Php35 at the time the
options were granted.
 On April 1, 2022, 3,000 options were terminated when the employees resigned from the company. The market
value of ordinary share was Php35 per share on this date.
 On march 31, 2023, 18,000 option shares were exercised when the market value of ordinary share was Php40
per share.
Based on the above ,determine the following:
1. Compensation expense in 2021 ________________.
Compensation expense, 2021 (Php525,000 x ½) Php 262,500

Compensations expense 262,500

Share options outstanding 262,500

2. Balance of share options outstanding in 2022 ____________.

Share Options Outstanding
-----------------------------------------------------------------------
: 262,500 Year 2021
: 210,000 Year 2022
----------------------------------------------------------------------
: 472,500
=======
3. Entry to record compensation expense in 2022.
Cumulative Compensation expense (525,000 x 27,000/30,000) Php 472,500
Less: 2021 Compensation expense 262,500
------------------------
Accrual 2022 Php 210,000
=============
Compensation expense 210,000
Share options outstanding 210,000

4. Journal entry to record exercise of the 18,000 options.

Cash (18,000 x Php25) 450,000
Share options outstanding(475,500x18/27) 315,000
Ordinary share capital (18,000x Php10) 180,000
Share premium 585,000

5. Balance of Share options outstanding as of December 31, 2023.

Share Options Outstanding
-----------------------------------------------------------------------
: 262,500 Year 2021
: 210,000 Year 2022
Exercise 315,000 :
----------------------------------------------------------------------
: 157,500
=======

Problem 2
At the beginning of 2023, Pau Company grants 100 share options to each of its 200 employees. Each grant is
conditional upon the employee working for the entity over the next three years. The entity estimates that the fair value of
each share option is Php45.

On the basis of a weighted average probability, the entity estimates that 25% if employees will leave during the three
year period and therefore forfeit their rights to the share options.

During 2023, 10 employees leave. The entity revises its estimates of total employee departures over the three year
period from 25% to 20%. During 2024, a further 8 employees leave. The entity revises its estimate of total employee
departures over the three year period from 20 percent to 15 percent. During 2025, a further 6 employees leave.
Required: Based on the above information, compute the following:

6. Compensation expense in 2023

200 employees x 100 options x 80% x Php45 x 1/3= Php240,000

7. Compensation expense in 2024

Cumulative compensation expense, 12/31/24
200 employees x 100 options x 85% x Php45 x 2/3 = 510,000
Less: Compensations accrued in 2023 240,000
-------------
Compensation expense in 2024 270,000
=======

8. Compensation expense in 2025

Cumulative compensation expense
(200 -10-8-6=176) x 100 options x Php45 792,000
Less: Cumulative compensations expense
As 12/31/2024 510,000
-----------
Compensation expense in 2025 282,000
=======
Problem 3
On January 1, 2023, Pau Company grants 100 cash share appreciation rights (SARs) to each of its 200 employees, on
condition that the employees remain in its employ for the next three years.

During 2023, 14 employees leave. The entity estimates that a further 24 will leave during 2024 and 2025. During 2024,
10 employees leave and entity estimates that a further 8 will leave during 2025. During2025, 6 employees leave. At the
end of 2025, 60 employees exercise their SARs, another 40 employees exercise their SARs at the end of 2027.

The entity estimates the fair value of the SARs at the end of each year in which a liability exists as shown below. At the
end of 2025, all SARs held by the remaining employees vest. The intrinsic values of the SARs at the date of exercise
(which equal the cash paid out) at the end of 2025, 2026, and 2027 are also known below:

Year Fair Value Intrinsic Value

2023 Php 30
2024 32
2025 36 Php 35
2026 42 40
2027 46
Required: Based on the above information, answer the following:
9. Compensation expense in 2023
(200-14-24=162) x 100 SARs x Php30 x 1/3 = Php162,000
==========
10. Compensation expense in 2024
Liability on SARs, 12/31/24
(200-14-10-8=168) x 100 SARs x Php32 x 2/3= Php 358,400
Less: Compensation expense-2023 162,000
-----------------
Compensation expense, 2024 Php 196,400
==========

11. Entry to record compensation expense for 2024

Compensation expense 196,400
Accrued compensation expense 196,400

12 and 13 Journal entry to record compensation expense and exercise of SARs in 2025
Compensation expense 37,600
Accrued compensation expense 37,600
Liability on SARs, 12/31/2025
(200-14-10-6-60=110) x 100 SARs x Php36 Php 396,000
Less: Cumulative expenses, as of 1/31/24 358,400
------------------
Compensation expense in 2025 37,600
==========
Compensation expense 210,000
 Cash 210,000
60 employees x 100 SARs x Php35 = 210,000
14. Compensation expense in 2024
37,600 + 210,000 = 147,600

15&16 Journal entry to record compensation expense and exercise of SARs in 2026
Accrued Compensation expense 102,000
Compensation expense 102,000

Liability on SARs, 12/31/2026

(200-14-10-6-60-40=70) x 100 SARs x Php42 Php 294,000
Less: Cumulative expenses, as of 1/31/25 396,000
------------------
Compensation expense in 2026 (102,000)
==========

Compensation expense 160,000

Cash 160,000
40 x 100 x Php40 =160,000

17. Compensation expense in 2026

160,000-102,000 = 58,000

18. Balance of Accrued Compensation expense (liability) in 2026

Accrued Compensation expense
---------------------------------------------------------------
2026 102,000 : 162,000 Year 2023
2027 294,000 : 196,400 Year 2024
: 37,600 Year 2025
---------------------------------------------------------------
396,000 : 396,000
====================================

19&20 Journal entry to record compensation expense and exercise of SARs in 2027

Accrued compensation expense 294,000

Compensation expense 294,000
Liability on SARs, 12/31/2027 Php -
Less: Cumulative expenses, as of 1/31/26 294,000
------------------
Compensation expense in 2027 (294,000)
===========

Compensation expense 322,000

Cash 322,000
70 x 100 x Php46 =Php322,000

21. Compensation expense in 2027

322,000-294,000 = 28,000

22. Balance of Accrued Compensation expense (liability) in 2027.

Problem 4***

On January 2, 2022, Pau Company issued Php2,000,000 of 8% convertible bonds at par. The bonds will mature on
January 1, 2026 and interest is payable annually every January 1. The bond contract entitles the bondholders to receive
6, Php100 par value ordinary shares in exchange for each Php1,000 bond. On the date of issue, the prevailing market
interest rate for similar debt without the conversion option is 10%.

On January 1, 2026, the bondholders of the bonds with total face value of Php1,000,000 exercised their conversion
privilege. On that date, the bonds were selling at 110 and the ordinary share at Php42.

Required: Based on the above information, answer the following questions: (Round off present value of factors to 4
decimal places)
23. The proceeds from issuance of convertible bonds to be allocated to the liability component is ___________.
PV of principal (Php2,000,000 x 0.6830) 10%, 4 periods Php 1,366,000
PV of interest ((Php2,000,000x 8%=160,000) x 3.1699; OA 10%, 4 periods 507,184
--------------------------
Liability component Php 1,873,184
===============

24. the proceeds from the issuance of convertible bonds to be allocated to the equity component is ________
Total proceeds Php 2,000,000
Less: Liability components 1,873,184
---------------------------
Equity components Php 126,816
===============

25. Entry to record acquisition of convertible bonds on January 2, 2022

Cash 2,000,000
Discount on bond payable 126,816
Convertible bonds payable 2,000,000
Share premium-conversion option 126,816

26. Prepare amortization table (2022 to 2026)

Date Nominal Interest (8%) Effective Interest(10%) Disc Amort CV

01/02/22 1,873,184
01/01/23 2M x 8% = 160,000 1,873,184 x 10% =187,318 27,318 1,900,502
01/01/24 160,000 1,900,502 x 10% = 190,050 30,050 1,930,552
01/01/25 160,000 1,930,552 x 10% = 193,055 33,055 1,963,607
01/01/26 160,000 1,963,607x 10% = 196,361 36,361 1,999,968
196393 36,393 2,000,000

27. The carrying amount of bonds payable on December 31, 2022 is _____________.
Refer to amort table: 1,900,502

28. The gain to be recognized on conversion of the bond is __________.

NIL or None or zero

29. Entry to record conversion of 1,000,000 convertible bonds on January 1, 2026.

Convertible bonds payable 1,000,000
Share premium-Conversion option (126,816 x ½) 63,408
Share capital (1,000,000/1,000 x 6 x Php100) 600,000
Share premium 463,408

30. Pau Company reported the following outstanding share capital on December 31, 2027:
* 30,000 shares 10% cumulative preference share, par value Php100 per share, fully participating as to
dividends. No dividends were in arrears in prior years.
* 200,000 ordinary shares with par value of Php10.
On December 31, 2027, the entity declared dividends of Php1,000,000.
What was the amount of dividends payable to ordinary shareholders?

Preferred Ordinary total

P- 30,000 x Php100 x 10% 300,000 300,000
O-200,000 x Php10 x 10% 200,000 200,000
Balance – Php500,000
P-3/5 x 500,000 300,000 300,000
O-2/5 x 500,000 200,000 200,000
600,000 400,000 1,000,000