PRACTICAL FINANCIAL ACCOUNTING

A. On January 1, 2020, the shareholders of Ethan Company, a calendar-year corporation, approved a

plan and granted the company’s three executives with options to purchase a total of 3,000 shares of
the company’s P100 par value ordinary shares. The option may be exercised for one-year effective
January 1, 2023. Based on an option pricing model, the fair value of the option is P60. The option
price per share is P120.

On February 14, 2022, one of the executives who was granted an option to purchase 800 shares,
decided to resign from the organization. On January 21, 2023, the remaining executives exercised
their options.

(1) How much is the compensation expense in the year 2022?

a. P60,000
b. P44,000
c. P12,000
d. P0

Compensation expense for 2020 and 2021

3,000 x 60 = 180,000; 180,000 x 2/3 = 120,000
Compensation expense for 2022: 2,200 x 60 = 132,000; 132,000 – 120,000 P12,000

There is no retrospective adjustment relating to the options of the executive who left the
organization. Effectively, adjustment is made in the current and future periods, if any. To
illustrate and prove the above amount, the compensation expense relating to executives who
remained is 2,200 x 60 x 1/3 = 44,000; The compensation expense recognized in 2020 and 2021
relating to the executive who left is 800 x 60 x 2/3 = 32,000; this amount is deducted from 44,000,
leaving a balance of 12,000.

B. On July 1, 2023, Tools Company granted share options to key employees for the purchase of 20,000
ordinary shares at P25 each share. The options are intended to compensate employees for the next
two years. The options are exercisable within one-year period beginning July 1, 2025 by grantees
still in the employ of the company. The market price of Tools’ ordinary share was P33 at the date
of grant. The fair value of the options cannot be reliably determined; thus, the intrinsic value
approach is applied to determine the fair value of the options. No share options were terminated
during the year.

(2) How much should Tools charge to compensation expense for the year ended December 31,
2023?
a. P0
b. P40,000
c. P80,000
d. P160,000

Intrinsic value of option 33-25 = 8.00

Compensation expense for six months ended December 31, 2023
20,000 x 8 = 160,000; 160,000/2 years = 80,000/year; 80,000 x ½ P40,000
 When the fair value of the options cannot be determined at time of grant, the intrinsic value
approach is used. The implied or intrinsic value of the option is the excess of the market price
of each share over the exercise price. Under this approach and because market price of each
share changes over time, the intrinsic or implied value changes every statement date.

C. On January 1, 2021, the shareholders of LeMann Company approved a plan granting certain officers
of the company non-transferable options to buy 30,000 shares of P100 par ordinary share capital at
P230 per share. The option pricing model used by the company indicates that the fair value of each
option on January 2, 2021 is P75. The plan provides that the officers must be employed by the
company for the next three years and that the options will expire at the end of 2024.

At the beginning of 2022, one of the officers who had been granted options for 8,000 shares left the
company. Officers with 20,000 options exercised their rights under the option plan at January 1,
2024. The remaining options lapsed.

(3) What are the amounts of compensation expense for the years 2021, 2022 and 2023, respectively?
a. P750,000; P350,000; P550,000
b. P750,000; P350,000; P350,000
c. P750,000; P550,000; P350,000
d. P750,000; P350,000; P325,000

Compensation expense for 2021

30,000 x 75 = 2,250,000; 2,250,000/3 years P750,000
Compensation expense for 2022
22,000 x 75 x 2/3 = 1,100,000; 1,100,000 – 750,000 P350,000
Compensation expense for 2023
22,000 x 75 = 1,650,000; 1,650,000 – 1,100,000 P550,000

(4) Assume that in addition to the officer with 8,000 options who left the company at the beginning
of 2022, another officer with 3,000 options left the organization during 2023. What are the
amounts of compensation expense for the years 2021, 2022 and 2023, respectively?
a. P750,000; P750,000; P325,000
b. P750,000; P350,000; P325,000
c. P750,000; P350,000; P550,000
d. P750,000; P350,000; P0

Compensation expense for 2021 (see No. 3) P750,000

Compensation expense for 2022 (see No. 3) P350,000
Compensation expense for 2023
19,000 x 75 = 1,425,000; 1,425,000 – 750,000 – 350,000 P325,000

D. The AIG Company granted 100 share options to each of its 200 employees on January 1, 2021. The
option plan allows the employees to purchase a share of the entity’s P100 par value ordinary at P180
per share. Based on the pricing model used by the company, the fair value of each option on January
1, 2021 is P30. The option plan requires the employees receiving the options to be in the employ of
the company for the next three years. Options are exercisable from January 1 to December 31, 2024.
At January 1, 2021, it was estimated that 20% of the employees will leave during the next three years.
Actual and revised estimate of employees leaving the company during 2021, 2022 and 2023 are as
follows:
2021: 8 employees left; additional 10 employees in 2022 and 2023.
2022: 12 employees left; additional 7 employees in 2023.
2023: 8 employees left.

During 2024, 140 employees exercised their options while the remaining employees allowed their
options to lapse.

(5) How much is the compensation expense for each of the years 2021, 2022 and 2023, respectively?
a. P172,000; P172,000; P172,000
b. P182,000; P346,000; P516,000
c. P182,000; P164,000; P170,000
d. P192,000; P168,000; P156,000

Compensation expense for 2021

182 x 100 x 30 = 546,000; 546,000 x 1/3 P182,000
Compensation expense for 2022
173 x 100 x 30 x 2/3 =346,000; 346,000 – 182,000 P164,000
Compensation expense for 2023
172 x 100 x 30 = 516,000; 516,000 – 182,000 – 164,000 P170,000

(6) How much is reported in equity pertaining to the options outstanding as of December 31, 2022?
a. P180,000
b. P182,000
c. P346,000
d. P516,000

As of December 31, 2022 (see No. 5) P346,000

(7) What is the amount credited to share premium account upon exercise of the options in 2024?
a. P0
b. P1,120,000
c. P1,400,000
d. P1,540,000

Subscription price upon exercise per share P180

Fair value of each option 30
Total P210
Par value 100
Excess credited to share premium per share P110
Number of shares/options exercised (140 x 100) 14,000
Amount credited to share premium P1,540,000
E. On January 1, 2021, an entity granted 15,000 share options to its employees. The share options will
vest at the end of three years provided the employees remain in the service.

The option price is P60 and the entity’s share price on the date of grant is also P60. The par value
of each share is P50. At the date of grant, the entity concluded that the fair value of the share options
cannot be reliably determined. The options can be exercised within three years from the vesting
date.

All share options vested at the end of three years and no employees left during the three-year vesting
period. The share prices and the number of share options exercised at year end are as follows:

Share price Options exercised

2021 63
2022 66
2023 75
2024 88 5,000
2025 100 7,500
2026 90 2,500

(8) What are the amounts of compensation expense for the years 2022 and 2023, respectively?
a. P45,000 and P165,000
b. P15,000 and P45,000
c. P165,000 and P130,000
d. P15,000 and P165,000

Compensation expense for 2021

15,000 x (63 – 60) = 45,000 x 1/3 = 15,000
Compensation expense for 2022
15,000 x (66 – 60) = 90,000; 90,000 x 2/3 = 60,000; 60,000-15,000 P 45,000
Compensation expense for 2023
15,000 x (75 – 60) = 225,000; 225,000 – 15,000 – 45,000 P165,000

(9) How much is the compensation expense for the year 2022?
a. P165,000
b. P130,000
c. P30,000
d. P0

Compensation expense for 2024 10,000 x (88-75) P130,000

F. On January 1, 2021, an entity granted 100 share appreciation rights to each of its 200 employees on
condition that the employees remain in its employ for the next three years. No employee left the
entity during the three-year vesting period. Exercise of the share appreciation rights were as follows:

December 31, 2023 40 employees

December 31, 2024 100 employees
December 31, 2025 60 employees
 The fair value and intrinsic value of the share appreciation rights are as follows:

Fair value Intrinsic value

December 31, 2021 15
December 31, 2022 18
December 31, 2023 20 15
December 31, 2024 21 20
December 31, 2025 25

(10) How much is the compensation expense in each of the years 2022 and 2023?
a. P100,000 and P140,000
b. P140,000 and P140,000
c. P100,000 and P100,000
d. P140,000 and P100,000

Compensation expense for 2021: (200 x 100 x 15 x 1/3 = 100,000)

Compensation expense for 2022
200 x 100 x 18 x 2/3 = 240,000; 240,000- 100,000 P140,000
Compensation expense for 2023
200 x 100 x 20 =400,000 – 240,000 = 160,000
Exercise of rights (20-15) x (40 x 100) (20,000) P140,000

(11) What is the Liability for Share Appreciation Rights account balance at the end of 2023?
a. P100,000
b. P126,000
c. P240,000
d. P320,000

Liability for share appreciation rights, December 31, 2023 (160 x 100 x 20) P320,000

G. For the past several years, the stewardship of the Chief Operating Officer (COO) of ABC Company
is responsible for its successful operations. In the last year’s operations, however, there was a slight
decline in ABC’s revenue figures.

In order to motivate the COO to obtain greater positive operations for the company, the board of
directors approved a share appreciation plan to take effect on January 1, 2021. The COO was issued
share appreciation rights exercisable for one year beginning January 1, 2023 provided that the officer
is still in the employ of the company at the date of exercise. The share appreciation right provides
for a cash payment equal to the excess of the ABC share price over P50. The equivalent number of
shares for share appreciation rights will be based on the level of sales of the company at the date of
exercise as follows:

Level of sales Equivalent shares granted

P100 million to P200 million 10,000
Over P200 million 12,000
 Actual sales achieved by ABC Company and the share prices at the end of each year are as follows:
Year Sales Share Price
2021 P120 million P77
2022 P250 million P75

(12) How much is the compensation expense recognized in the accounts for the year ended December
31, 2021?
a. P135,000
b. P270,000
c. P385,000
d. P770,000

Compensation expense for 2021

10,000 shares x (77 – 50) = 270,000; 270,000 x ½ P135,000

(13) How much is the compensation expense for the year 2022?
a. P900,000
b. P515,000
c. P300,000
d. P165,000

Compensation expense for 2022

12,000 shares x (75 – 50) = 300,000; 300,000 – 135,000 P165,000

H. On January 1, 2022, an entity granted to a senior officer the right to choose either
• 10,000, P25 par, ordinary shares (share alternative) or
• cash payment equal 7,500 shares of P25 par ordinary shares (cash alternative)

The grant is conditional upon the completion of three years of service. If the senior officer chooses
the share alternative, the shares must be held for three years after vesting date.

On January 1, 2022, the price per ordinary share is P50. The ordinary share prices for the three-year
vesting period are:
December 31, 2022 - P52
December 31, 2023 - P57
December 31, 2024 - P61

After taking into account the effects of post vesting restrictions, the entity has estimated that the fair
value of the share alternative is P48 per share.

(14) What are the amounts accounted for as liability and equity, respectively on January 1, 2022?
a. P480,000 and P105,000
b. P480,000 and P0
c. P375,000 and P105,000
d. P520,000 and P35,000
 Fair value of share alternative (10,000 x 48) P480,000
Amount accounted as liability (7,500 x 50) 375,000
Amount accounted as equity P105,000

(15) How much is the compensation expense for 2022 relating to the equity alternative and cash
alternative, respectively?
a. P105,000 and P390,00
b. P35,000 and P130,000
c. P35,000 and P108,750
d. P0 and P0

Compensation expense for 2022 relating to equity (105,000/3 years) P35,000

Compensation expense for 2022 relating to debt
7,500 x 52 = 390,000; 390,000/3 years P130,000

(16) How much is the compensation expense for 2023 relating the equity alternative and cash
alternative, respectively?
a. P105,000 and P427,500
b. P35,000 and P200,000
c. P35,000 and P155,000
d. P35,000 and P142,500

Compensation expense for 2023 relating to equity (same as in 2022) P 35,000

Compensation expense for 2023 relating to debt
7,500 x 57 = 427,500; 427,500 x 2/3 = 285,000; 285,000 – 130,000 P155,000

(17) Assuming that the senior officer opted for the cash alternative, how much is the total payment
made by the company at time of exercise?
a. P457,500
b. P427,500
c. P390,000
d. P610,000

Payment upon exercise opting for cash alternative (7,500 x 61) P457,500

I. Ravnica Company, a public limited company, has purchased inventory of P100,000. The company
has offered the supplier a choice of settlement alternatives. The alternatives are either receiving 1,000
shares of Ravnica six months after the purchase date (valued at P110,000 at the date of purchase) or
receiving a cash payment equal to the fair value of 800 shares as of December 31, 2023 (estimated
value P90,000 at the date of purchase).

(18) What should be the accounting entry at the date of purchase of the inventory?
a. Dr. Inventory P90,000, Cr. Liability P90,000.
b. Dr. Inventory P100,000, Cr. Liability P100,000.
c. Dr. Inventory P100,000, Dr. Intangible asset P10,000, Cr. Liability P110,000.
d. Dr. Inventory P100,000, Cr. Liability P90,000, Cr. Equity P10,000.

Value of inventories P100,000

Fair value of debt 90,000
Residual to equity P10,000
J. In the tax jurisdiction of Behemoth, a publicly listed company, a tax deduction is allowed for the
intrinsic value of the share options issued to employees. The company issued options on January 1,
2023, worth P15 million to employees. They vest in three years. The share options’ intrinsic value
at December 31, 2023, was P12 million. The tax rate in the jurisdiction is 30%.

(19) What is the tax effect of the above issue of share options at December 31, 2023?
a. P1.5 million benefit to statement of comprehensive income.
b. P1.2 million benefit to statement of comprehensive income.
c. P1.5 million benefit recognized in equity.
d. P1.2 million benefit recognized in equity.

Intrinsic value at 30% over 3 years (P12M x 30% / 3 years) P1,200,000

If the estimated or actual tax deduction (12M) is less than or equal to
the cumulative recognized expense (15M), the associated tax benefits
are recognized in the statement of comprehensive income.

(20) What would be the tax effect if the intrinsic value at December 31, 2023, was P21 million?
a. P2.1 million tax benefit to income.
b. P2.1 million recognized in equity.
c. P1.5 million tax benefit to income, P0.6 million recognized in equity.
d. P1.5 million recognized in equity, P0.6 million tax benefit to income.

Expense recognized (P15M x 30% / 3 years) P1,500,000

Excess benefit over the intrinsic value {(P21M-15M) x 30% / 3 years} P600,000

If the estimated or actual tax deduction (21M) exceeds the cumulative recognized
compensation expense (15M), the excess tax benefits are recognized directly in a
separate component of equity.

K. On January 1, 2023, Mirage Corporation (the parent company) grants 10,000 shares to senior
executives of Ice Ace Enterprise (the subsidiary company), subject to a service condition of two years
in the subsidiary. Each option has a fair value of P25 at the grant date. At the grant date, Mirage
estimates that 75% of the employees will complete the two-year service period. This estimate does
not change during the vesting period. At the end of the vesting period, 80% of the employees
complete the required two years of service. Mirage does not require Ice Age to pay for the shares.

(21) How much is the employment cost for 2023?

a. P93,750
b. P125,000
c. P187,500
d. P250,000

Employment cost (P/L) 93,750

Equity (Contribution from Mirage) 93,750
(10,000 shares x 75% x P25 x ½ year)
(22) How much is the employment cost for 2024?
a. P106,250
b. P156,250
c. P187,500
d. P200,000

Employment cost (P/L) 106,250

Equity (Contribution from Mirage) 106,250
(10,000 shares x 80% x P25) – 93,750