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Chapter 13
Share-based Payments (Part 2)
PROBLEM 1: TRUE OR FALSE
1. TRUE
2. FALSE
3. TRUE
4. FALSE
5. TRUE

PROBLEM 2: MULTIPLE CHOICE – THEORY

1. A
2. C
3. D
4. D
5. C

PROBLEM 3: EXERCISES

1. Solution:
Jan. 1,
20x1 Memo entry
Dec. Salaries expense – SARs [900 x 24 x 1/3] 7,200
31,
Accrued salaries payable 7,200
20x1
Dec. Salaries expense – SARs 8,800
31,
[800 x 30 x 2/3] – 7,200
20x2
Accrued salaries payable 8,800
Dec. Salaries expense – SARs 8,000
31,
[750 x 32 x 3/3] – 16,000
20x3
Accrued salaries payable 8,000
Dec. Accrued salaries payable 24,000
31,
Cash (750 x 32) 24,000
20x3

2. Solution:
⮚ Bulldozer Co. has issued a compound financial instrument
because the choice of settlement is given to the counterparty.
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The fair values of the debt and equity alternatives of the

compound instrument on Jan. 1, 20x1 are determined as
follows:
Fair value of equity alternative (1,200 x ₱112) 134,400
Fair value of debt alternative (1,000 sh. x ₱120) 120,000

Because the fair values of the settlement alternatives differ,

the fair value of the equity component will be greater than zero, in
which case the fair value of the compound financial instrument is
the greater of the amounts determined. The difference between
that amount and the fair value of the debt alternative is attributed
to the equity alternative.
Fair value of compound instrument (the greater 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
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Journal entries:
Jan. 1,
20x1
Memo entry
Dec. 31, Salaries expense 52,800
20x1
Share premium – sh. options outs. 4,800
Salaries payable 48,000
Dec. 31, Salaries expense 60,800
20x2
Share premium – sh. options outs. 4,800
Salaries payable 56,000
Dec. 31, Salaries expense 62,800
20x3
Share premium – sh. options outs. 4,800
Salaries payable 58,000

Settlement
Scenario (a) Scenario (b)
Employee chooses equity. Employee chooses cash.
Dec. 31, 20x3: Dec. 31, 20x3:
Salaries payable 162K Salaries payable 162K
Share capital (1,200 x ₱100 par) 120K Cash (1,000 sh. x ₱162) 162K
Share premium 42K
Dec. 31, 20x3: Dec. 31, 20x3:
Sh. prem. - sh. options outs. 14.4K Sh. prem. - sh. options outs. 14.4K
Share premium 14.4K Share premium 14.4K
to transfer the equity component directly to transfer the equity component directly
within equity within equity

PROBLEM 4: MULTIPLE CHOICE – COMPUTATIONAL

1. D (20,000 x 16 x1/2) = 160,000

2. D
☞ Jan. 1, 20x1: 0
☞ Dec. 31, 20x2: (10,000 SARs x 10 employees x 18 x 2/3) = 1,200,000
☞ Dec. 31, 20x3: (10,000 x 10 x 20 x 3/3) = 2,000,000

3. C

☞ 20x1: (10,000 SARs x 10 employees x 15 x 1/3) = 500,000

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☞ 20x2: (10,000 x 10 x 18 x 2/3) – 500,000 = 700,000

☞ 20x3: (10,000 x 10 x 20 x 3/3) – 500,000 – 700,000 = 800,000

4. B [10,000 rights x (10 – 2) x ₱10 x 2/3 = 533,333

5. B

Salaries expense:
20x1: [30,000 x (25 – 20) x 1/3] = 50,000
20x2: [30,000 x (28 – 20) x 2/3] – 50,000 = 110,000

Salaries payable:
20x2: [30,000 x (28 – 20) x 2/3] = 160,000

6. C
Jan. 1, 20x1:
Inventory (@ fair value of asset received) 960,000
Accounts payable (10,000 x 88) 880,000
Share premium – options outstanding 80,000

7. B (720K + 80K ‘see entries below’) = 800K total credit

⮚ The liability component is remeasured to fair value as follows:
Fair value of debt component, Dec. 31, 20x1 (10,000 sh. x 1,120,000
₱112)
Fair value of debt component, Jan. 1, 20x1 (10,000 sh. x ₱88) (880,000)
Loss on remeasurement of liability (increase in liability) 240,000

Dec. Loss on remeasurement of liability 240,000

31, Accounts payable 240,000
20x
to remeasure the liability to fair value on settlement date
1

Scenario 1 Scenario 2
Equity settlement. Cash settlement.
Dec. 31, 20x1: Dec. 31, 20x1:
Accounts payable 1.120M Accounts payable 1.120M
Share capital (10,000 x ₱40 par) 400K Cash 1.120M
Share premium 720K to record the payment in cash
to record the issuance of equity instrument

Dec. 31, 20x1: Dec. 31, 20x1:

Sh. prem. - sh. options outs. 80K Sh. prem. - sh. options outs. 80K
Share premium 80K Share premium 80K
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to transfer the equity component directly to transfer the equity component directly
within equity within equity

8. D (10,000 x ₱112) = 1,120,000

9. A
Fair value of debt alternative (2,500 sh. x ₱30) 75,000
Fair value of equity alternative (3,000 x ₱28) 84,000

Fair value of compound instrument (the greater amount) 84,000

Fair value of debt alternative (75,000)
Fair value of equity alternative at grant date 9,000

10. A (2,500 x 39 x 2/3) = 65,000

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

⮚ Salaries expense in 20x2:

Salaries expense related to the equity component:
(9,000 x 2/3) – 3,000 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

⮚ Salaries expense in 20x3:

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

12. C
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The fair values of the alternatives are determined as follows:

Fair value of debt component [800K x PV of ₱1 @10%, 601,052
n=3]
Fair value of equity component (given) 8,000

The amortization table for the debt component is prepared

as follows:
Date Interest expense Discount Present value
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

13. A
⮚ 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 debt 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
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⮚ 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

14. B

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

15. C

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 OCI 15,000

Optional Reconciliation:

Tax benefit recognized in profit or loss 135,000

Tax benefit recognized in OCI 15,000

Total tax benefit 150,000

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Divide by: Tax rate 30%

Total tax deduction (intrinsic value) 500,000
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PROBLEM 5: FOR CLASSROOM DISCUSSION

1. Solution:
January 1, 20x1:
Memo entry

December 31, 20x1:

Salaries expense (1,000 x 20 x 96% x 112 x 1/3) 716,800
Accrued salaries payable 716,800

December 31, 20x2:

Salaries expense 812,000
(1,000 x 20 x 98% x 117 x 2/3) – 716,800
Accrued salaries payable 812,000

December 31, 20x3:

Salaries expense 799,200
(1,000 x 20 x 97% x 120 x 3/3) – 716,800 – 812,000
Accrued salaries payable 799,200

Accrued salaries payable 2,328,000

Cash 2,328,000

2. Solution:
Bridge Co. has issued a compound instrument because the choice
of settlement is given to the counterparty. The fair value of the
equity component is computed as follows:

Fair value of machine received (Asset) 500,000

Fair value of debt component (Liability) on 1/1/x1 (2,000 sh. x ₱220) (440,000)
Fair value of equity component (Equity) 60,000

Journal entry:
Jan. Machine 500,000
1, Accounts payable 440,000
20x1
Share premium – sh. options outstanding 60,000

⮚ The liability component is remeasured to fair value as follows:

Fair value of debt component, Dec. 31, 20x1 (2,000 sh. x 430,000
₱215)
Fair value of debt component, Jan. 1, 20x1 (2,000 sh. x ₱220) (440,000)
Gain on remeasurement of liability (decrease in
liability) (10,000)
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Journal entry:
Dec. Accounts payable 10,000
31, Gain on remeasurement of liability 10,000
20x
to remeasure the liability to fair value on settlement
1 date

Journal entries:
Scenario 1 Scenario 2
Golf Co. chooses equity settlement. Golf Co. chooses cash settlement.
Dec. 31, 20x1: Dec. 31, 20x1:
Accounts payable 430K Accounts payable 430K
Share capital (2,000 x ₱100 par) 200K Cash 430K
Share premium 230K to record the payment in cash
to record the issuance of equity instrument

Dec. 31, 20x1: Dec. 31, 20x1:

Sh. prem. - sh. options outs. 60K Sh. prem. - sh. options outs. 60K
Share premium 60K Share premium 60K
to transfer the equity component directly to transfer the equity component directly
within equity within equity

3. Solution:
The fair values of the debt and equity alternatives of the
compound instrument on Jan. 1, 20x1 are determined as follows:
Fair value of debt alternative (8,000 sh. x ₱220) 1,760,000
Fair value of equity alternative (given) 1,970,000

Because the fair values of the settlement alternatives differ,

the fair value of the equity component will be greater than zero, in
which case the fair value of the compound financial instrument is
the greater of the amounts determined. The difference between
that amount and the fair value of the debt alternative is attributed
to the equity alternative.

Fair value of compound instrument (the greater amount) 1,970,000

Fair value of debt alternative
(1,760,000)
Fair value of equity alternative at grant date 210,000

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

Salaries expense related to the equity component:
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(210,000 x 1/3) 70,000

Salaries expense related to the liability component:
(8,000 x ₱270 x 1/3) 720,000
Total salaries expense - 20x1 790,000

Journal entry:
Jan. 1,
20x1
Memo entry
Dec. 31, Salaries expense 790,000
20x1
Share premium – sh. options outs. 70,000
Salaries payable 720,000

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

Salaries expense related to the equity component:
(210,000 x 2/3) – 70,000 70,000
Salaries expense related to the liability component:
(8,000 sh. x ₱240 x 2/3) – 720,000 560,000
Total salaries expense - 20x2 630,000

Journal entry:
Dec. 31, Salaries expense 630,000
20x2
Share premium – sh. options outs. 70,000
Salaries payable 560,000

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

Salaries expense related to the equity component:
(210,00 x 3/3) – 70,000 – 70,000 70,000
Salaries expense related to the liability component:
(8,000 sh. x ₱280 x 3/3) – 720,000 – 560,000 960,000

Total salaries expense - 20x2 1,030,000

Journal entry:
Dec. Salaries expense 1,030,00
31,
Share premium – sh. options outs. 0 70,000
20x3
Salaries payable 960,00
0

Settlement
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Scenario 1 Scenario 2
Employee chooses equity. Employee chooses cash.
Dec. 31, 20x3: Dec. 31, 20x3:
Salaries payable 2.24M(a) Salaries payable 2.24M(a)
Share capital (10,00 x ₱10 par) 100K Cash (8,000 sh. x ₱280) 2.24M
Share premium 2.14M to record the payment in cash
to record the issuance of equity instrument

Dec. 31, 20x3: Dec. 31, 20x3:

Sh. prem. - sh. options outs. 210K Sh. prem. - sh. options outs. 210K
Share premium 210K Share premium 210K
to transfer the equity component directly to transfer the equity component directly
within equity within equity

(a)
(720K + 560K + 960K = 2.24M)

Notes:
☞ The components of the compound financial instrument are accounted for
separately as liability and equity.
☞ The equity component is not subsequently remeasured; the liability
component is remeasured at each year-end.
☞ The total salaries expense recognized on the equity component is equal to
₱7,200 (i.e., the assigned value on grant date). The total salaries expense
recognized on the debt component is equal to ₱81,000 (i.e., the fair value on
Dec. 31, 20x3).