Rogationist College – Silang

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Chapter 25
Share-Based Compensation
Share Appreciation Right

In Partial Fulfillment of Requirements in Intermediate Accounting 3

Mr. John Rick Gatdula, CPA

Ponce, Marjorie A.

CT18-0001

BSA401

21 March 2020
 Chapte r 25
Share-Based Compensation
Share Appreciation Right

Problem 1 (AICPA Adapted)

On January 1, 2020. Morey Company granted Dean, 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
exercise date over the market price on the grant date. Dean did not exercise any of the
rights during 2020.
The market price of Morey’s share was P30 on January 1, 2020 and P45 on December
31, 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

Problem 2 (AICPA Adapted)

Wolf Company granted of 30,000 share appreciation rights enabling the key employees
to receive cash equal to the difference between P20 and the market price of the share
on the date each right is exercised.
The service period is 2016 through 2018, and the rights are exercisable in 2019 and
2020.
The market price of the share was P25 and P28 on December 31, 2016 and 2017,
respectively.
What amount should be reported as the liability under the share appreciation rights in
December 31, 2017 statement of financial position?
a. 240,000
b. 130,000
c. 160,000
d. 0

Problem 3 (ACP)
On January 1, 2020, Excelsior Company offered the chief executive officer share
appreciation rights with the following terms:
Predetermined price on January 1, 2020 P100 per share
Number of shares 10,000 shares
Service Period 3 years
Exercise Date December 31, 2022
The share appreciation rights are exercised on December 31, 2022
Quoted Price
January 1, 2020 100
December 31, 2020 118
December 31, 2021 112
December 31, 2022 124
What amount of compensation expense should be recognized for 2021?
a. 160,000
b. 60,000
c. 80,000
d. 20,000

Problem 4 (IFRS)
Melissa Company granted 100 share appreciation rights to each of the 1,000
employees on January 1, 2020.
The management estimated that 90% percent of the awards will vest on December 31,
2022. The fair value of each share appreciation right on December 31, 2022 is P10.
What is the fair value of the liability for the share appreciation rights on December 31,
2020?
a. 100,000
b. 900,000
c. 300,000
d. 450,000

Problem 5 (IAA)
On January 1, 2020, Alpha Company offered share appreciation rights with the following
terms:
Predetermined price P100 per share
Number of shares 50,000 shares
Service Period 3 years
Exercise Date December 31, 2023

The quoted prices per share are 100, 124, 151, and 151 on January 1, 2020, December
31, 2020, December 31, 2021, and December 31, 2022, respectively.
What amount should be reported as compensation expense for 2022 as a result of the
share appreciation rights?
a. 2,550,000
b. 1,300,000
c. 850,000
d. 0

Problem 6 (IFRS)
On January 1, 2020, Omega Company granted the chief executive officer (CEO) 80,000
share appreciation rights for past services. The rights are exercisable immediately and
expire on December 31, 2021.
On exercise, the CEO is entitled to receive cash for the excess of the share market
price on exercise date over the market price on grant date.
The CEO did not exercise any of the rights in 2020. The CEO exercised the rights on
December 31, 2021 when the market price was P115.
The market price of the share was P100 on January 1, 2020 and P120 on December
31, 2020.
What amount should be recognized as gain on reversal o share appreciation rights in
2021?
a. 1,600,000
b. 1,200,000
c. 400,000
d. 0

Problem 7 to 9 (IFRS)
On January 1, 2020, Svetlana Company granted to employees a share-based payment
with cash and share alternative.
The provisions include the right to a cash payment equal to the value of 10,000
phantom shares or 15,000 ordinary shares with a par value of P40.
The grant is conditional upon the completion of three years' service. If the employees
choose the share alternative, the shares must be held for three years after the vesting
date.
At grant date, the share price is P60. At the end of 2020, 2021 and 2022 the share
prices are P63, P66 and P72, respectively.
After taking into account the effect of vesting restrictions, the entity estimated that the
fair value of the share alternative on grant date is P45.
On January 1, 2023, the employees selected the share alternative.

7. What is the equity component on January 1, 2020 arising from the share based
payment with cash and share alternative?
a. 675,000
b. 600,000
c. 225,000
d. 75,000

8. What is the compensation expense for 2022?

a. 720,000
b. 355,000
c. 280,000
d. 305,000

9. What amount of share premium should be recorded from the issuance of shares
on January 1, 2023?
a. 195,000
b. 120,000
c. 480,000
d. 375,000

Problem 10 to 12 (IAA)
On January 1, 2020, Planet Company purchased equipment with a cash price of P
2,000,000. The supplier can choose how the purchase is to be settled.
The choices are 20,000 shares with par value of P50 in one year's time, or a cash
payment equal to the market value of 15,000 phantom shares on December 31, 2020.
At grant date on January 1, 2020, the market price of each share is P80 and on the date
of settlement on December 31, 2020, the market price of each share is P100.

10. What is the equity component arising from the purchase of equipment with share
and cash alternative?
a. 500,000
b. 400,000
c. 800,000
d. 0

11. What amount of interest expense should be recognized on December 31, 2020 if
the supplier has chosen the cash alternative?
a. 600,000
b. 400,000
c. 300,000
d. 0

12. What amount should be recognized as share premium on December 31, 2020 if
the supplier has chosen the share alternative?
a. 2,000,000
b. 1,000,000
c. 200,000
d. 800,000

Problem 13 to 15 (IAA)
On January 1, 2020, Kristen Company established a share appreciation rights plan for
the executives.
The plan entitled them to receive cash at any time during the next four years for the
difference between the market price of the ordinary share and a pre-established price of
P20 on 60,000 share appreciation rights or SARs.
On December 31, 2022, 20,000 SARs are exercised by executives.

Market Price
January 1, 2020 25 per share
December 31, 2020 28 per share
December 31, 2021 35 per share
December 31, 2022 30 per share

13. What amount of compensation expense should be recognized for 2020?

a. 480,000
b. 120,000
c. 300,000
 d. 180,000

14. What amount of compensation expense should be recognized for 2021?

a. 900,000
b. 420,000
c. 105,000
d. 225,000

15. What amount should be recognized as accrued liability for share appreciation
rights on December 31, 2022?
a. 600,000
b. 300,000
c. 400,000
d. 200,000

Problem 16
The stockholders of Meadow Corp. approved a stock-option plan that grants the company's
top three executives options to purchase a maximum of 1,000 shares each of Meadow's P2
par common stock for P19 per share. The options were granted on January 1 when the fair
value of the stock was P20 per share. Meadow determined that the fair value of the
compensation is P300,000 and the vesting period is three years. What amount of
compensation expense from the options should Meadow record in the year the options were
granted?
a. P20,000
b. P60,000
c. P100,000
d. P300,000

Problem 17
On January 1, year 1, the board of directors of a corporation granted 10,000 stock options to
the CEO. Each option permits the purchase of one share of stock at P25 per share, the
current market price of the stock. The options are exercisable on December 31, year 4, as
long as the CEO is still employed. The options expire on December 31, year 5. The grant
date fair value of each option is P5. The corporation must recognize
a) P50,000 of compensation expense when the options are exercised.
b) P50,000 of compensation expense in year 1.
c) P12,500 of compensation expense per year for four years.
d) P10,000 of compensation expense per year for five years.

Problem 18
A restricted stock award was granted at the beginning of 2005 calling for 3,000 shares
of stock to be awarded to executives at the beginning of 2009. The fair value of one
option was P20 at grant date. During 2007, 100 shares were forfeited because an
executive left the firm.
What amount of compensation expense is recognized for 2007?
a. P14,000
b. P15,000
c. P14,500
d. P13,500

Problem 19
On January 1, year 1, a company issued its employees 10,000 shares of restricted
stock. On January 1, year 2, the company issued to its employees an additional 20,000
shares of restricted stock. Additional information about the company's stock is as
follows:

Date Fair value of stock (per share)

January 1, year 1 P20
December 31, year 1 22
January 1, year 2 25
December 31, year 2 30

The shares vest at the end of a four-year period. There are no forfeitures. What amount
should be recorded as compensation expense for the 12-month period ended
December 31, year 2?
a. P175,000
b. P205,000
c. P225,000
d. P500,000

Problem 20
On January 2, 2005, Morey Corp. granted Dean, its president, 20,000 stock
appreciation rights for past services. Those rights are exercisable immediately and
expire on January 1, 2008.
On exercise, Dean is entitled to receive cash for the excess of the stock's market price
on the exercise date over the market price on the grant date. Dean did not exercise any
of the rights during 2005. The market price of Morey's stock was P30 on January 2,
2005 and P45 on December 31, 2005.
As a result of the stock appreciation rights, Morey should recognize compensation
expense for 2005 of
a. P0
b. P100,000
c. P300,000
d. P600,000

Problem 21
A company granted its employees 100,000 stock options on January 1, Year 1. The
stock options had a grant date fair value of P15 per option and a three-year vesting
period. On January 1, Year 2, the company estimated the fair value of the stock options
to be P18 per option. Assuming that the company did not grant any additional options or
modify the terms of any existing option grants during Year 2, what amount of share-
based compensation expense should the company report for the year ended December
31, Year 2?
a. P500,000
b. P600,000
c. P700,000
d.P800,000

Problem 22 to 40 (IFRS)
22. The payment for services in cash and based on the price of the entity’s ordinary
shares is what type of share-based payment transaction?
a. Asset-settled share-based payment transaction
b. Liability-settled share-based payment
c. Cash-settled share-based payment transaction
d. Equity-settled share-based payment transaction

23. Share options are what type of share-based payment transaction?

a. Asset-settled share-based payment transaction
b. Liability-settled share-based payment transactionquity-settled share-based
payment transaction
c. Cash-settled share-based payment transaction
d. Liability-settled share-based payment transaction

24. The total compensation expense in a share option plan is measured at

a. Fair value of share options on date of grant
b. Fair value of share options on date of exercise
c. Intrinsic value of share options on date of grant
d. Intrinsic value of share options on date of exercise

25. It is the difference between the fair value of the shares to which the counter party
has the right to subscribe and the price the counter party is required to pay for
those shares
a. Fair value
b. Intrinsic value
c. Market value
d. Book value

26. The date on which total compensation expense is computed in a share option
plan is the
a. Date of grant
b. Date of exercise
c. Date when the market price coincides with the option price
d. Date when the market price exceeds the option price

27. When issuing share options to employees, which of the following factors is most
relevant in determining the accounting treatment?
a. The par value of the shares issued
 b. The market value of the shares issued
c. The authorized number of shares
d. Whether the share options are issued in lieu of salary

28. For transactions with employees, the fair value of the equity instrument granted is
measured on
a. Exercise date
b. Grant date
c. End of reporting period
d. Beginning of the year of grant

29. It is a contract that gives the employees the right, but not the obligation, to
subscribe to the entity's shares at a fixed or determinable price for a specific
period of time
a. Share option
b. Share warrant
c. Share appreciation right
d. Share split

30. A stock option plan with a positive fair value at grant date caused compensation
expense of P50,000 per year to be recorded over the five-year service period.
During the exercise period (two years), the stock price never exceeded the option
price. Therefore, none of the options was exercised.
Choose the correct statement about the accounting for these options.
a. The contributed capital increase from recording compensation expense is
reversed, causing compensation expense to be reduced in the eighth year after grant.
b. The contributed capital increase from recording compensation expense is left
intact.
c. The financial statements during the service period are retroactively restated by
removing the compensation expense.
d. The compensation expense for later option grants is reduced by the amount
recognized on the options that expired.

31. On which of the following dates is a public entity required to measure the cost of
employee services in exchange for an award of equity interests, based on the fair
market value of the award?
a. Date of grant.
b. Date of restriction lapse.
c. Date of vesting.
d. Date of exercise.

32. Under the fair-value method of accounting for stock option plans, total compensation
recognized
a. Is based on the value of the option at the grant date, adjusted for forfeitures.
b. Equals the net increase in OE after all relevant journal entries are recorded.
 c. Is the difference between market price and option price at the grant date.
d. Is unaffected by the option price.
33. Select the correct statement about executive compensation plans involving stock.

a. The total amount of compensation expense for a restricted stock award plan is
recognized when the stock is issued.
b. The total amount of compensation expense for a restricted stock award plan is
determined at the grant date.
c. For stock-appreciation rights plans payable in cash, compensation expense is
recognized only during the service period.
d. For stock-appreciation rights plans payable in cash, compensation expense
recognized in any given reporting period cannot be negative.

34. An Entity grants one hundred share option to each of its five directors on 1 July
20X4, the option vest. On 30 Jun 20X8. what will be the accounting entry in the
financial statements ended 30 June 20X5?
a. Increase equity P2,500, increase in expenses through profit or loss P2,500.
b. Increase equity P500, increase in expenses through profit or loss P500.
c. Increase equity P625, increase in expenses through profit or loss P625.
d. Increase equity P1250, increase in expenses through profit or loss P1250.

35. Which of the following parties cannot be granted shares or share options by the
entity?
a. Non-executive director
b. Executive director
c. Supplier of goods and services
d. Chief Accountant
e. None of the above

36. IFRS 2 applies to share-based payment transactions in which an entity

__________ goods or services.
a) Acquires
b) Receives
c) Transfers
d) Delivers
e) A and B
37. An entity shall apply IFRS 2 to share-based payment transactions in which the
entity acquires goods as part of the net assets acquired in a business
combination as defined by IFRS 3 Business Combinations.
a. True
b. False

38. For equity-settled share-based payment transactions, the entity shall measure
the goods or services received, and the corresponding increase in equity,
directly, at the __________ of the goods or services received, unless that it
cannot be estimated reliably.
 a. Amortised cost
b. Fair Value
c. Net book value
d. Historical cost
39. Which of the following statement about expected vesting period agrees with IFRS
2?
a. The entity shall estimate the length of the expected vesting period at
measurement date based on the contractual obligations
b. The estimate of the length of the expected vesting period shall be consistent
with the assumptions used in estimating the fair value of the options granted, and
may be subsequently revised
c. The entity shall estimate the length of the expected vesting period at grant
date, based on the most likely outcome of the performance condition
d. The entity shall revise its estimate of the length of the vesting period annually

40. For a share-based payment transaction in which the terms of the arrangement
provide an entity with the choice of whether to settle in cash or by issuing equity
instruments, the entity shall determine whether it has ____________ to settle in
cash and account for the share-based payment transaction accordingly.
a. A future obligation
b. A contingent liability
c. A present obligation
d. A deferred liability

Straight Problem 41
A company issued share options on 1 June 20X6 to pay for the purchase of inventory.
The inventory is eventually sold on 31 December 20X8. The value of the inventory on 1
June 20X6 was P6m and this value was unchanged up to the date of sale. The sale
proceeds were P8m. The shares issued have a market value of P6.3m.

How will this purchase of inventory be dealt with in the financial statements?

Straight Problem 42
A company grants 2,000 share options to each of its three directors on 1 January 20X6,
subject to the directors being employed on 31 December 20X8. The options vest on 31
December 20X8. The fair value of each option on 1 January 20X6 is P10, and it is
anticipated that on 1 January 20X6 all of the share options will vest on 30 December
20X8. The options will only vest if the company’s share price reaches P14 per share.

The share price at 31 December 20X6 is P8 and it is not anticipated that it will rise over
the next two years. It is anticipated that on 31 December 20X6 only two directors will be
employed on 31 December 20X8.

How will the share options be treated in the financial statements for the year ended 31
December 20X6?
Straight Problem 43
Jay, a public limited company, has granted 300 share appreciation rights to each of its
500 employees on 1 July 20X5. The management feel that as at 31 July 20X6, the year-
end of Jay, 80% of the awards will vest on 31 July 20X7. The fair value of each share
appreciation right on 31 July 20X6 is P15.

What is the fair value of the liability to be recorded in the financial statements for the
year ended 31 July 20X6?

Straight Problem 44
A company operates in a country where it receives a tax deduction equal to the intrinsic
value of the share options at the exercise date. The company grants share options to its
employees on 1 January 20X5 with a fair value of P4.8m at the grant date. The intrinsic
value of the options at 31 December 20X5 is P3.8m and at the exercise date is P4.2m.
The tax rate applicable to the company is 30% and the share options vest on 31
December 20X6.

What deferred tax asset should be recorded in the financial statements for the year
ended 31 December 20X5 and 20X6?

Straight Problem 45
A company issues fully paid shares to all 500 existing employees on 31 July 20X8.
Shares issued to employees normally have vesting conditions attached to them and
vest over a three-year period, at the end of which the employees have to be in the
company’s employment. However these shares have been given to the employees
because of the performance of the company during the year. The shares have a market
value of P2m on 31 July 20X8 and an average fair value over the previous 12 months of
P3m. It is anticipated that in three-years’ time there will be 400 employees at the
company.

What amount would be expensed to profit or loss for the year ended 31 July 20X8?

Straight Problem 46
A company grants 750 share options to each of its six directors on 1 May 20X7. The
options vest on 30 April 20X9. The fair value of each option on 1 May 20X7 is P15 and
P10 per share on 30 April 20X8. It is anticipated that all of the share options will vest on
30 April 20X9. What will be the accounting entry in the financial statements for the year
ended 30 April 20X8?

Straight Problem 47
A public limited company has granted 700 share appreciation rights (SARs) to each of
its 400 employees on 1 January 20X6. The rights are due to vest on 31 December 20X8
with payment being made on 1 January 20X9. During 20X6, 50 employees leave, and it
is anticipated that a further 50 employees will leave during the vesting period. Fair
values of the SARs are as follows:
 1 January 20X6 15  

31 December 20X6 18  

31 December 20X7 20  

What will be recorded in the financial statements on 31 December 20X6 for the share
appreciation rights?

Comprehension questions 48 to 50
 
48. Why do standard setters formulate rules on the measurement and recognition of
share-based payment transactions?
49. What is the difference between equity-settled and cash-settled share-based
payment transactions?
50. What is the different accounting treatment for instruments classified as debt and
those classified as equity?