Intermediate Accounting 3

1. Chapter 4: Share-Based Payments (Part 2)

5. Assessment Tasks

1. An entity grants 1,000 share appreciation rights (SARs) to each of its 20 employees on January 1, 20x1. Employees
earn a cash payment equal to the appreciation in the share price between January 1, 20x1 and December 31,
20x3. The share appreciation rights vest on December 31, 20x3.

Date % of SARs expected to vest Fair value per SAR

1/1/x1 95% 100
12/31/x1 96% 112
12/31/x2 98% 117
12/31/x3 97% 120

Requirements: Provide the entries in 20x1, 20x2 and 20x3 to record compensation expense.

Use the following information for the next two questions:

An entity 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. The entity expects that only 90% of the share options will
vest. The tax laws applicable to the entity only allow the intrinsic value of the share options for tax deduction. The
entity's tax rate is 30%.

2. The intrinsic value of the share options on December 31, 20x1 is P1,200,000.

Requirement: Compute for the tax benefit relating to the share options to be recognized in (a) profit or loss and (b)
other comprehensive income in 20x1.

3. The intrinsic value of the share options on December 31, 20x1 is P1,500,000.

Requirement: Compute for the tax benefit relating to the share options to be recognized in (a) profit or loss and (b)
other comprehensive income in 20x1.

4. Lightning Company granted 5,000 share appreciation rights (SARS) to employees for services on January 1,
2008: Employees earn a cash payment equal to the appreciation in the share price between January 1, 2008 and
December 31, 2010. The share appreciation rights vest on December 31, 2010.

Date Fair value of each SAR No. of SARs expected to vest

1-Jan-08 10 4,500
31-Dec-08 12 4,500
31-Dec-09 21 4,750
31-Dec-10 18 4,850

Requirements: Provide the entries in 20x1, 20x2 and 20x3 to record compensation expense.

5. Thunder Company's grant of 30,000 stock appreciation rights enables key employees to receive cash equal to the
difference between P20 and the market price of the stock on the date each right is exercised. The service period
is 2008 through 2010, and the rights are exercisable in 2011. The market price of the stock was P25, P28 and

Page 1 of 5
Chapter 4 | Intermediate Accounting 3
 P27 on December 31, 2008, 2009, and 2010, respectively. The fair values of the stock appreciation rights cannot
be reliably measured.

Requirements: Compute for the following:

a. Compensation expense recognized in 2008, 2009 and 2010.
b. Liability recognized as of December 31, 2008, 2009 and 2010.

6. On January 1, 2008, Storm, Inc. granted 80,000 cash shares appreciation rights to the executives on condition
that the executives remain in its employ for the next three years. The entity estimates that the fair value of the
stock appreciation rights at the end of each year in which a liability exists are as follows:

Year Fair Value

2008 15
2009 18
2010 20

Requirement: Provide the journal entries in 2008, 2009 and 2010.

7. On January 1, 2008, Cement Co. granted 20,000 shares with fair value of P30 per share to its key officers,
conditional upon the completion of three years' service. By the end of 2009, the share price has dropped to P26
per share. Immediately, Cement Co. adds a cash alternative to the grant, whereby the officer can choose whether
to receive 20,000 shares or cash equal to the value of 20,000 shares on vesting date, which is on December 31,
2010. On December 31, 2010, the share price is P24.

Requirements:
a. How much is the compensation expense in 2010?
b. What is the balance of the liability component of the instrument as of December 31, 2009?
c. What is the balance of the liability component of the instrument as of December 31, 2010?
d. What is the balance of the equity component of the instrument as of December 31, 2009?
e. What is the balance of the equity component of the instrument as of December 31, 2010?
f. Provide the journal entries in 2008, 2009 and 2010.

8. on January 1, 20x1, TORMENT AGONY co. granted 1,000 share appreciation rights (SARS) to employees with
the condition that the employees remain in service for the next three years. Information on the SARS is shown
below:

Date No. of SARs expected to vest Fair value of each SAR

Jan. 1. 20x1 1,000 20
Dec. 31, 20x1 900 24
Dec. 31, 20x2 800 30
Dec. 31, 20x3 750 32

All of the 750 SARs that vested were exercised on December 31, 20x3. The intrinsic value (which is equal to the
cash paid out) is equal to the fair value of the SARs of P32 on December 31, 20x3.

Requirement: Provide all the necessary journal entries.

9. On January 1, 2015, Tamayo Inc. granted stock options to officers and key employees for the purchase of 20,000
shares of the company’s P10 par common stock at P25 per share. The options were exercisable within a 5-year
period beginning January 1, 2017, by grantees still in the employ of the company, and expiring December 31,
2021. The service period for this award is 2 years. Assume that the fair value option-pricing model determines
total compensation expense to be P350,000.

Page 2 of 5
Chapter 4 | Intermediate Accounting 3
 On April 1, 2016, 2,000 options were terminated when the employees resigned from the company. The market
price of the common stock was P35 per share on this date.

On March 31, 2017, 12,000 options were exercised when the market price of the common stock was P40 per
share.

Instructions: Prepare journal entries to record issuance of the stock options, termination of the stock options,
exercise of the stock options, and charges to compensation expense, for the years ended December 31, 2015,
2016, and 2017.

10. On January 1, 2013, Nolledo Corporation granted 10,000 options to key executives. Each option allows the
executive to purchase one share of Nolledo’ P5 par value common stock at a price of P20 per share. The options
were exercisable within a 2-year period beginning January 1, 2015, if the grantee is still employed by the company
at the time of the exercise. On the grant date, Nolledo’ stock was trading at P25 per share, and a fair value option-
pricing model determines total compensation to be P400,000.

On May 1, 2015, 8,000 options were exercised when the market price of Nolledo’ stock was P30 per share. The
remaining options lapsed in 2017 because executives decided not to exercise their options.

Instructions: Prepare the necessary journal entries related to the stock option plan for the years 2013 through
2017.

11. On December 31, 2010, Belmonte Company issues 150,000 stock appreciation rights to its officers entitling them
to receive cash for the difference between the market price of its stock and a pre-established price of P10. The fair
value of the SARs is estimated to be P4 per SAR on December 31, 2011; P1 on December 31, 2012; P10 on
December 31, 2013; and P9 on December 31, 2014. The service period is 4 years, and the exercise period is 7
years.

Instructions
a. Prepare a schedule that shows the amount of compensation expense allocable to each year affected by the
stock-appreciation rights plan.
b. Prepare the entry at December 31, 2014, to record compensation expense, if any, in 2014.
c. Prepare the entry on December 31, 2014, assuming that all 150,000 SARs are exercised.

12. Bueno Company adopted a stock-option plan on November 30, 2013, that provided that 70,000 shares of P5 par
value stock be designated as available for the granting of options to officers of the corporation at a price of P9 a
share. The market price was P12 a share on November 30, 2014.

On January 2, 2014, options to purchase 28,000 shares were granted to president Tom Winter—15,000 for
services to be rendered in 2014 and 13,000 for services to be rendered in 2015. Also, on that date, options to
purchase 14,000 shares were granted to vice president Michelle Bennett—7,000 for services to be rendered in
2014 and 7,000 for services to be rendered in 2015. The market price of the stock was P14 a share on January 2,
2014. The options were exercisable for a period of one year following the year in which the services were
rendered. The fair value of the options on the grant date was P4 per option.

In 2015, neither the president nor the vice president exercised their options because the market price of the stock
was below the exercise price. The market price of the stock was P8 a share on December 31, 2015, when the
options for 2014 services lapsed.

On December 31, 2016, both president Winter and vice president Bennett exercised their options for 13,000 and
7,000 shares, respectively, when the market price was P16 a share.

Page 3 of 5
Chapter 4 | Intermediate Accounting 3
 Instructions: Prepare the necessary journal entries in 2013 when the stock-option plan was adopted, in 2014
when options were granted, in 2015 when options lapsed, and in 2016 when options were exercised.

13. Assume that Alcaraz Co. has a stock-option plan for top management. Each stock option represents the right to
purchase a share of Alcaraz P1 par value common stock in the future at a price equal to the fair value of the stock
at the date of the grant. Alcaraz has 5,000 stock options outstanding, which were granted at the beginning of
2014. The following data relate to the option grant.

Exercise price for options P40

Market price at grant date (January 1, 2014) P40
Fair value of options at grant date (January 1, 2014) P6
Service period 5 years

Instructions
a. Prepare the journal entry(ies) for the first year of the stock-option plan.
b. Prepare the journal entry(ies) for the first year of the plan assuming that, rather than options, 700 shares of
restricted stock were granted at the beginning of 2014.
c. Now assume that the market price of Alcaraz stock on the grant date was P45 per share. Repeat the
requirements for (a) and (b).
d. Alcaraz would like to implement an employee stock-purchase plan for rank-and-file employees, but it would
like to avoid recording expense related to this plan. Which of the following provisions must be in place for the
plan to avoid recording compensation expense?
1. Substantially all employees may participate.
2. The discount from market is small (less than 5%).
3. The plan offers no substantive option feature.
4. There is no preferred stock outstanding.

6. References

Millan, Z. 2019. Intermediate Accounting. Bandolin Enterprises

Philippine Financial Reporting Standards (PFRS)

Page 4 of 5
Chapter 4 | Intermediate Accounting 3
ISUE__ __ Syl ___
Revision: 02
Effectivity: August 1, 2020

Page 5 of 5
Chapter 4 | Intermediate Accounting 3