INTERMEDIATE ACCOUNTING IV

(review)
Quiz 1 Share option
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
c. P1,350. years
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
40,000 x 30 = 1,200,000 -600,000
= 600,000

Salaries – share options 600,0000

Share option outstanding 600,000

Entries upon exercise and expiration expiration

Cash (35,000 x125) 4,375,000

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

SO outstanding (5,000 x30) 150,000

Share premium -unexercised 150,000
 Quiz 2 Share appreciation rights
1. For stock appreciation rights, the measurement date for computing compensation is the
date
a. the rights mature.
b. the stock’s price reaches a predetermined amount.
c. of grant of exercise
d. of exercise
2. A company estimates the fair value of SARs, using an option-pricing model, for
a. share-based equity awards.
b. share-based liability awards.
c. both equity awards and liability awards.
d. neither equity awards or liability awards.
3. Share appreciation rights are what type of share-based payment transactions?
a. Asset settled share-based payment transaction
b. Liability settled share-based payment transaction
c. Cash settled share-based payment transaction
d. Equity settled share-based payment transaction
4. A cash settled share-based payment transaction increase which of the following?
a. A current asset
b. A non-current asset
c. Equity
d. A liability
5. What is the measurement date for a share-based payment to employees that is classified
as liability?
a. The service inception date
b. The grant date
c. The settlement date
d. The end of reporting date

6. On January 2, 2012, for past services, Rosen Corp. granted Nenn Pine, its
president, 20,000 stock appreciation rights that are exercisable immediately
and expire on January 2, 2013. On exercise, Nenn is entitled to receive cash for
the excess of the market price of the stock on the exercise date over the market
price on the grant date. Nenn did not exercise any of the rights during 2012. The
market price of Rosen's stock was Php30 on January 2, 2012, and Php45 on
December 31, 2012. As a result of the stock appreciation rights, Rosen should
recognize compensation expense for 2012 of
a. Php0.
b. Php100,000.
c. Php300,000.
d. Php600,000
45-35 = 15

15x 20,000 shares = 600,000/ 2

vesting period

= 300,000
 II. COMPREHENSIVE PROBLEM

On January 1, 2012, Korsak, Inc. established a stock appreciation rights plan for its
executives. It entitled them to receive cash at any time during the next four years for the
difference between the market price of its common stock and a pre-established price of
Php20 on 80,000 SARs. Current market prices of the stock are as follows:
January 1, 2012 Php35 per share
December 31, 2012 38 per share
December 31, 2013 30 per share
December 31, 2014 33 per share

Compensation expense relating to the plan is to be recorded over a four-year period

beginning January 1, 2012.
Journal entries
Compute the compensation expense for
2012: P360,000 2012

2013: P40,000 Salaries P360,000

2014: P380,000 Accrued salaries payable P360,000

Show the entries journal entries for the year:
2013
2012,2013,2014 Salaries P40,000
Solutions Accrued salaries payable P40,000
SARs: 80,000 2014
Predetermined price = P20
Salaries P380,000
Vesting period = 4 years
Accrued salaries payable P380,000
2012:

Market value Dec 31, 2012 = 38 -20 =18

18 x 80,000 =1,440,000 /4years

=P360,000
Granted shares = 40,000
2013
Option price = P125
Market value Dec 31, 2013 = 30 -20 =10 FV of share option = P30
10 x 80,000 =800,000 /4years Vesting period = 2years

200,000 x 2 years = 400,000 cumulative compensation as of 2013

Year 2020
(360,000)compensation for 2012 40,000 x 30 = 1,200,000/ 2 years
40,000 compensation for 2013
= 600,000

2014 Salaries – share options 600,0000

Market value Dec 31, 2014 = 33 -20 =13 Share option outstanding 600,000

13 x 80,000 =1040 x 3/4years

=780,000 cumulative compensation as of 2014

(400,000) cumulative compensation recognized (360,000 + 160,000)

380,000 compensation for 2013

SHARE-BASED PAYMENT TRANSACTIONS
True or False
1. Under the fair value method, companies compute total compensation expense based on
the fair value of options on the date of exercise. False
2. The service period in stock option plans is the time between the grant date and the
vesting date. True
3. If an employee fails to exercise a stock option before its expiration date, the company
should decrease compensation expense. False
4. If an employee forfeits a stock option because of failure to satisfy a service requirement,
the company should record paid-in capital from expired options. False

Multiple Choice

5. The distribution of stock rights to existing common stockholders will increase paid-in
capital at the
Date of Issuance Date of Exercise
of the Rights of the Rights
a. Yes Yes
b. Yes No
c. No Yes
d. No No

6. Which of the following is not a characteristic of a non-compensatory stock option plan?

a. Substantially all full-time employees may participate on an equitable basis.
b. The plan offers no substantive option feature.
c. Unlimited time period permitted for exercise of an option as long as the holder is still
employed by the company.
d. Discount from the market price of the stock no greater than would be reasonable in
an offer of stock to stockholders or others.

7. 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.

.
COMPREHENSIVE PROBLEM

1. On January 1, 2022, Trent Company granted his 500 employees an option to buy 300
shares each of Trent Co. shares of 25 par value for Php30 per share, the option
exercisable for 5 years from date of grant. The rights are exercisable after three-year
service period. The fair value of the share options on January 1, 2022 cannot be estimated
reliably.

The market value of shares is as follows:

January 1, 2022 Php40 per share

December 31, 2022 Php46 per share
December 31, 2023 Php48 per share
December 31, 2024 Php49 per share

On December 31,2022, 10 employees had left and the company anticipated 10 employees to
leave the company by the end of 2023.

On December 31, 2023, 15 employees actually left and the company anticipated another 20
employees to leave by the end of 2024.

On December 31, 2024, no employees actually left. The remaining employees exercised all
their share option on December 31, 2024.
 Compute the compensation expenses for the year: Show your solution (2 points each and 3 points
for each correct solution) 2022,2023,2024

Provide the journal entries upon the exercise of share option. (3 points)

2. Given the same scenario in Problem 1, only that Trent Company established share appreciation
rights (SARs) instead of share option. The predetermined price on January 1, 2022 is Php32.

Compute the compensation expenses for the year: Show your solution (2 points each and 3 points
for each correct solution). 2022,2023,2024

:
1. If share-based payment transaction provides that the employees have the right to choose the
settlement whether in cash or shares, the entity is deemed to have issued.
a. A compound financial instrument
b. An equity instrument
c. A liability instrument
d. Either an equity instrument or a liability instrument but not both.
2. Net investment in a direct financing lease is equal to
a. Cost of the asset
b. Cost of the asset plus initial direct cost paid by the lessor
c. Cost of the asset minus guaranteed residual value
d. Cost of the asset plus unguaranteed residual value
3. Which statement characterizes sales type lease?
a. The lessor recognizes only interest revenue over the useful life of the asset.
b. The lessor recognizes only interest revenue over the lease term.
c. The lessor recognizes a dealer profit at lease inception and interest revenue over the lease
term.
d. The lessor recognizes a dealer profit at lease inception and interest revenue over the
useful life of the asset.
4. Taxable income of a corporation differs from pretax financial income because of
Permanent Differences Temporary Differences
a. No No
b. No Yes
c. Yes Yes
d. Yes No

5. Taxable income of a corporation

a. differs from accounting income due to differences in intraperiod allocation between the two
methods of income determination.
b. differs from accounting income due to differences in interperiod allocation and permanent
differences between the two methods of income determination.
c. is based on generally accepted accounting principles.
d. is reported on the corporation's income statement.
6. 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.
7. Which of the following is not a characteristic of a non-compensatory share option plan?
a. Substantially all full-time employees may participate on an equitable basis.
b. The plan offers no substantive option feature.
c. Unlimited time period permitted for exercise of an option as long as the holder is still
employed by the company.
d. Discount from the market price of the stock no greater than would be reasonable in an
offer of stock to stockholders or others.
8. Assuming a 40% statutory tax rate applies to all years involved, which of the following situations will
give rise to reporting a deferred tax liability on the balance sheet?
I. A revenue is deferred for financial reporting purposes but not for tax purposes.
II. A revenue is deferred for tax purposes but not for financial reporting purposes.
III. An expense is deferred for financial reporting purposes but not for tax purposes.
IV. An expense is deferred for tax purposes but not for financial reporting purposes.
a. item II only
b. items I and II only
c. items II and III only
d. items I and IV only
9. Rowen, Inc. had pre-tax accounting income of P900,000 and a tax rate of 40% in 2020, its first year
of operations. During 2020 the company had the following transactions:

DTA Received rent from Jane, Co. for 2021 P32,000

Non taxable Municipal bond income P40,000
DTL Depreciation for tax purposes in excess of book
Depreciation P20,000
DTL Installment sales revenue to be collected in 2011 P54,000

For 2020, what is the amount of income taxes payable for Rowen, Inc?
a. P301,600 c. P343,200
b. P327,200 d. P386,400

10. On January 1, 2020, Chikitita Company granted Daniel, the president, 20,000 share appreciation
rights for past services. These rights are exercisable immediately and expire on December 31, 2021.
On exercise, Dean is entitled to receive cash for the excess of the market price on the date over the
market price on the grant date. Dean did not exercise any of the rights during 2020.
As a result of the share appreciation rights, what amount should be recognized as compensation
expense for 2020?
a. 600,000
b. 100,000
c. 300,000 d. 0
11. Irish company granted 10,000 share options to each of its five directors on January 1, 2020. The
options vest on January 1, 2024.
The fair value of each option on January 1, 2020 is P50 and it is anticipated that all of the share
options will vest on January 1, 2024.
What amount should be reported as compensation expense for 2020?
a. 750,000
b. 500,000
c. 625,000

d. 125,000
Use the following information for questions 12 and 13.
At the beginning of 2020, Pitman Co. purchased an asset for P600,000 with an estimated useful life of
5 years and an estimated salvage value of P50,000. For financial reporting purposes the asset is
being depreciated using the straight-line method; for tax purposes the double-declining balance
method is being used. Pitman Co.’s tax rate is 40% for 2020 and all future years.
12. At the end of 2020, what is the book basis and the tax basis of the asset?
Book basis Tax basis
a. P440,000 P310,000
b. P490,000 P310,000
c. P490,000 P360,000

d. P440,000 P360,000

13. At the end of 2020, which of the following deferred tax accounts and balances is reported on
Pitman’s balance sheet?
Account Balance
a. Deferred tax asset P52,000
b. Deferred tax liability P52,000

c. Deferred tax asset P78,000

d. Deferred tax liability P78,000

14. Minimum lease payments may include a

a. penalty for failure to renew.
b. bargain purchase option.
c. guaranteed residual value.
d. any of these
15. The Lease Liability account should be disclosed as
a. all current liabilities.
b. all noncurrent liabilities.
c. current portions in current liabilities and the remainder in noncurrent liabilities.
II. COMPREHENSIVE PROBLEMS. Show your solutions. (3 points each)
1. Hapon Company is a dealer in machinery.
At the beginning of current year, a machinery was leased to Lessee Company with the following
provisions:
Annual rental payable at the end of each year 400,000
Lease term 5 years
Useful life of machinery 5 years
Cost of machinery 1,000,000
Implicit interest rate 12%
Present value of ordinary annuity of 1 for 5 years at 12% 3.60

a. What is the unearned interest income? 560,000

b. What should be the gross profit on sale?
440,000

2. At the beginning of
Annual rental payable at the end of each year 1,000,000
Lease bonus 300,000
Cost of restoration at present value 330,000
Annual executory cost paid by lessee 50,000
Bargain purchase option that is reasonable certainly to be exercised 500,000
Initial direct cost 20,000
Lease incentive 20,000
Lease term 4 years
Useful life of machinery 8 years
Implicit interest rate 10%
Present value of 1 for 4 years at 10% .68

a. What is the initial lease liability? 3,509,865.45

b. What is the cost of right of use asset? 4,189,865.45
c. What is the depreciation for the current year? 523,733.18
d. What is the interest expense for the current year?350,986.54
Use the following information for questions 3, 4 and 5.
The estimated litigation expense of P1,250,000 will be deductible in 2022 when it is expected to be
paid. The gross profit from the installment sales will be realized in the amount of P500,000 in each of
the next two years. The estimated liability for litigation is classified as noncurrent and the installment
accounts receivable are classified as P500,000 current and P500,000 noncurrent. The income tax
rate is 30% for all years.
3. The income tax expense is: 150,000
4. The deferred tax asset to be recognized is: 375,000

5. The deferred tax liability—current to be recognized is: 150,000

Use the following information for questions 6 -10.
On January 1, 2022, Trent Company granted his 500 employees an option to buy 300 shares each of
Trent Co. shares of 30 par value for Php40 per share. The rights are exercisable after three-year service
period. The fair value of the share options on January 1, 2022 is P20.
The market value of shares is as follows
January 1, 2022 Php50 per share
December 31, 2022 Php52 per share
December 31, 2023 Php51 per share
December 31, 2024
Php53 per share

On December 31,2022, 10 employees had left and the company anticipated 20 employees to
leave the company by the end of 2023.
On December 31, 2023, 15 employees actually left and the company anticipated another 10
employees to leave by the end of 2024.
On December 31, 2024, 10 employees actually left. The remaining employees exercised all their
share option on December 31, 2024.
Compute the compensation expenses for the year:
6. 2022: 940,000
7. 2023: 920,000
8. 2024: 930,000

9. Upon the

10. To record unexercised share options

NO ENTRY. All share options are exercised