A081 Intermediate Accounting 2

Chapter 13 – Shared Based Payments (Part 2)

GROUP 4

Leader: Parayno, Jhon Lloyd B.

Members: Meneses, Trixie Ann T.
Molina, Dianna Lynn L.
Novencido, Marina Fe B.
Paa, Lheslie Ann P.
Padilla, Angel Ann I.

Problem 3: Exercises
Jhon Lloyd B. Parayno
2. On Jan. 1, 20x1; Bulldozer Co. granted its chief executive officer (CEO) the right to receive 1,200 Bulldozer
shares or cash equal to the value of 1,000 Bulldozer shares. The grant vests on Dec 31, 20x3. Bulldozer’s
shares have a par value per share of 100, and the following quoted prices.
January 1, 20x1 120
December 31, 20x1 144
December 31, 20x2 156
December 31, 20x3 162

Bulldozer Co. estimated that the fair value of the share alternative on January. 1 20x1 is 112 per share. The
CEO exercised the grants on December 31, 20x3.
Requirement: Provide the journal entries in 20x1 to 20x3. On settlement date, assume the following scenario’s;
a. The CEO chooses to receive shares; and
b. The CEO chooses to receive cash.
Solution:
Bulldozer Co. has created a compound financial instrument by allowing the counterparty to select the method of
settlement. The following formula is used to calculate the fair values of the debt and equity options of the
compound instrument as of January 1, 20x1.
Fair value of equity alternative (1,200 x 112) 134,400
Fair value of debt alternative (1,000 share. x 120) 120,000
Because due to the differences in the fair values of the settlement possibilities, the equity component's fair
value will be more than zero, making the fair value of the compound financial instrument the bigger of the
amounts computed. The equity alternative is responsible for the difference between that sum and the debt
alternative's fair value.
Fair value of compound instrument (the more than amount) 134,400
Fair value of debt alternative (120,000)
Fair value of equity alternative at grant date 14,400

 The salaries expenses are computed as follows:

20x1

Salaries expense related to the equity component: (14,400 x 1/3) 4,800

Salaries expense related to the liability component: (1,000 x 144 x 1/3) 48,000
Total salaries expense - 20x1 52,800

20x2
Salaries expense related to the equity component:(14,400 x 2/3) - 4,800 4,800
Salaries expense related to the liability component:(1,000 x 156 x 2/3) – 48,000 56,000
Total salaries expense - 20x2 60,800

20x3
Salaries expense related to the equity component:
(14,400 x 3/3) – 4,800 – 4,800 4,800
Salaries expense related to the liability component:
(1,000 x 162 x 3/3) – 48,000 – 56,000 58,000
Total salaries expense - 20x3 62,800

Journal Entries
January 1. 20x1 Memorandum
December 31. Salaries expense 52,800
20x1 Share premium – share. options outstanding. 4,800
Salaries payable 48,000
December 31. Salaries expense 60,800
20x2 Share premium – share. options outstanding. 4,800
Salaries payable 56,000
December 31. Salaries expense 62,800
20x3 Share premium – share. options outstanding. 4,800
Salaries payable 58,000
Settlement
Employee chooses equity Employee chooses cash
Scenario A Scenario B
Dec. 31, 20x3: Dec. 31, 20x3:
Salaries payable 162,000 Salaries payable 162,000
Share capital (1,200 x 100 par) 120,000 Cash (1,000 share. x 162) 162,000
Share premium 42,000
Dec. 31, 20x3: Dec. 31, 20x3:
Share premium. Shr. options outs. 14.400 Share premium. Shr. options outs. 14.400
Share premium 14.400 Share premium 14.400
 to transfer the equity component directly  to transfer the equity component directly
within equity within equity

Problem 4: Multiple Choice - Computation

Trixie Ann T. Meneses
Use the following information for the next two questions:
On Jan. 1, 20x1, Elegee Co. granted an employee the right to choose between 3,000 shares of Elegee or cash
equal to the value of 2,500 Elegee shares, as an additional compensation. The grant is conditional upon the
completion of a three-year service. If the employee chooses the shares, he must hold the shares for at least
three years from the exercise date. After taking to account the post-vesting condition, Elegee estimated that the
grant date fair value of the share alternative is ₱28 per share. Elegee’s share has a par value per share of ₱10.
The market prices per share are as follows:

January 1, 20x1 ₱30

December 31, 20x1 36
December 31, 20x2 39
December 31, 20x3 40

11. In relation to the grant, what amount of expense is recognized in 20x3?

a) 33,000
b) 35,000
c) 38,000
d) 40,000

ANSWER: c) 38,000
Solution:

 The salaries expense in 20x1 is computed as follows:

Salaries expense related to the equity component:
(9,000 x 1/3) 3,000
Salaries expense related to the liability component:
(2,500 sh. x ₱36 x 1/3) 30,000
Total salaries expense – 20x1 33,000

 The salaries expense in 20x2 is computed as follows:

Salaries expense related to the equity component:
(9,000 x 2/3) – 3000 3,000
Salaries expense related to the liability component:
(2,500 sh. x ₱39 x 2/3) – 30,000 35,000
Total salaries expense – 20x2 38,000

 The salaries expense in 20x3 is computed as follows:

Salaries expense related to the equity component:
(9,000 x 3/3) – 3,000 – 3,000 3,000
Salaries expense related to the liability component:
(2,500 sh. x ₱40 x 3/3) – 30,000 – 35,000 35,000
Total salaries expense – 20x3 38,000

Angel Anne I. Padilla

12. On Jan. 1, 20x1, Six-string Bass Co. granted an employee the night to choose to receive either P800,000
cash or 50,000 of Six- string Bass Co.'s shares with par value of P10 per share. The grant was given as a
bonus for the employee's past services. The share alternative is exercisable immediately starting on the grant
date and expires after three years. However, the cash alternative is exercisable only on Dec. 31, 20X3 and
expires within a year. The grant date fair value of the share alternative is P8,000. The quoted prices of the
shares are as follows: P20 on Jan 1, 201, P19 on Dec. 31, 20x1, P28 on Dec. 31, 202, and P29 on Dec. 31,
203. The appropriate discount rate is 10%. What amounts for the following are reported in Six-string Bass Co.’s
20x2 financial statements?
Salaries Payable Share Premium-options Salaries Expense
a. 0 5,333 2,667
b. 661,157 0 66,116
c. 727,273 8,000 0
d. 800,000 8,000 0
ANSWER: c) 727,273; 8,000; 0
Solution:
The fair values of the alternatives are determined as follows:
Fair value of debt component [800K x PV of ₱1@10%, n=3] 601,052
Fair value of equity component (given) 8,000

The amortization table for the debt component is prepared as follows:

DATE INTEREST DISCOUNT PRESENT VALUE
EXPENSE
Jan. 1, 20x1 198,948 601,052

Dec. 31, 20x1 60,105 138,843 661,157

Dec. 31, 20x2 66,116 72,727 727,273

Dec. 31. 20x3 72,727 0 800,000

Journal entries (before settlement):

Jan. 1 Salaries expense (601, 052 + 8,000) 609, 052
20x1 Salaries Payable 601,052
Share premium – options outstanding 8,000
Dec. 31 Interest expense 60, 105
20x1 Salaries payable 60,105
Dec. 31 Interest expense 66, 116
20x2 Salaries payable 66,116
Dec. 31 Interest expense 72, 727
20x3 Salaries payable 72,727

Lheslie Ann P. Paa

13. On January 1, 20x1, Sultan Co. grants 2,000 shares with fair value of ₱165 per share to an employe,
conditional upon the completion of three years’ service. On December 31, 20x2, the share price drops to ₱125
per share and Sultan Co. adds a cash alternative to the grant. The employee can now choose to receive either
2,000 shares or cash equal to the value of 2,000 shares on the vesting date. On December 31, 20x3, the share
price is ₱110. How much are the salaries expense in 20x1, 20x2 and 20x3, respectively?
a. 110,000; 110,000; 80,000
b. 110,000; 166,667; 53,333
 c. 110,000; 166,667; 26,667
d. 108,000; 80,000; 24,000
ANSWER: a) 110,000; 110,000; 80,000
Solution:
Salaries Expense in 20x1
Dec. 31 Salaries Expense (2,000 x ₱165 x 1/3) 110,000
20x1 Share premium – sh. Options outstanding 110,000

Salaries Expense in 20x2:

Fair value of original instrument at grant date (2,000 x ₱165) 330,000
Fair value of dept. component (2,000 x ₱125) (250,000)
Fair value of equity component 80,000
Salaries Expense related to the equity component:
(80,000 newly assigned value x 2/3) – 110,000 (56,667)
Salaries expense related to the liability component:
(2,000 sh. x ₱125 x 2/3) 166,667
Total salaries expense – 20x2 110,000

Salaries Expense in 20x3:

Salaries expense related to the equity component:
(80,000 x 3/3) – 110,000 – (56,667) 26,667
Salaries expense related to the liability component:
(2,000 sh. X ₱110 x 3/3) – 166,667 53,333
Total salaries expense – 20x3 80,000

Dianna Lynn L. Molina

Use the following information for the next two questions:
Spinner Co. grants 500 share options to each of its 100 employees on January 1, 20x1. The fair value per
option on this date is P30. The options vest on December 31, 20x3. Spinner Co. expects that only 90% of the
share options will vest. The tax laws applicable to Spinner Co. allow only the intrinsic value of the share options
for tax deduction. Spinner Co.'s tax rate is 30%.
14. If the intrinsic value of the share options on December 31, 20x1 is P1,200,000, how should Spinner Co.
account for the tax effect of the share options?
 a. recognize income tax benefit of P120,000 in equity
b. recognize income tax benefit of P120,000 in profit or loss
c. recognize income tax benefit of P15,000 in equity
d. recognize income tax benefit of P15,000 in profit or loss
ANSWER: b) recognize income tax benefit of P120,000 in profit or loss

Solution:
Tax deduction - intrinsic value - (1.2M x 1/3) 400,000
Salaries expense (500 x 100 x 30 x 90% x 1/3) (450,000)
Excess tax deduction -

Tax deduction - intrinsic value - (1.2M x 1/3) 400,000

Multiply by: 30%
Tax benefit recognized in profit or loss 120,000

Marina Fe B. Novencido
15. If the intrinsic value of the share options on December 31, 20x1 is ₱1,500,000, how should Spinner Co.
account for the tax effect of the share options?
a. recognize income tax benefit of ₱120,000 in equity
b. recognize income tax benefit of ₱120,000 in profit or loss
c. recognize income tax benefit of ₱15,000 in equity
d. recognize income tax benefit of ₱15,000 in profit or loss

ANSWER: c) recognize income tax benefit of P15,000 in equity

Solution:
Tax deduction - intrinsic value - (1.5M x 1/3) 500,000
Salaries expense (500 x 100 x 30 x 90% x 1/3) (450,000)
Excess tax deduction 50,000

Salaries expense 450,000

Multiply by: 30%
Tax benefit recognized in profit or loss 135,000

Excess tax deduction 50,000

Multiply by: 30%
Tax benefit recognized in Equity 15,000