SOL. MAN. Chapter 12 Share Based Payments (PART 1) 2021 PDF

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Chapter 12Share-based Payments (Part 1)PROBLEM 1: TRUE OR FALSE1. TRUE2. TRUE3. TRUE4. TRUE5. FALSE6. FALSE7. FALSE8. TRUE9. TRUE10. TRUEPROBLEM 2: MULTIPLE CHOICE – THEORY1. C2. D3. C4. B5. D6. B7. C8. A9. B10. D11. C12. C13. C14. B15. C – The addition of an exercise price (whensupposedly the share...

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Chapter 12 Share-based Payments (Part 1) PROBLEM 1: TRUE OR FALSE 1. TRUE 2. TRUE 3. TRUE 4. TRUE 5. FALSE 6. FALSE 7. FALSE 8. TRUE 9. TRUE 10. TRUE PROBLEM 2: MULTIPLE CHOICE – THEORY 1. C 2. D 3. C 4. B 5. D 6. B 7. C 8. A 9. B 10. D 11. C 12. C 13. C 14. B 15. C – The addition of an exercise price (when supposedly the share options are exercisable for free) is not beneficial to the employee. Fogs Co. should ignore the repricing and continues to account for the grant under the original terms. PROBLEM 3: EXERCISES 1. Solution: May No entry 22,

Page | 2 20x1 June 21, 20x1

Inventories (1,000 x 3,000) Subscribed share capital

3,000, 000

(10,000 x 200)

Share premium (squeeze) July 5, 20x1

Subscribed share capital Share capital

2,000, 000 1,000, 000

2,000, 000

2,000, 000

2. Solution: Jan No entry . 1, 20 x1 De c. 31, 20 x1 De c. 31, 20 x2 De c. 31, 20 x3

Salaries expense – share options [(100 x 1,000) x 80% x 30 x 1/3] Share premium – sh. options outs.

800,0 00

Salaries expense – share options

740,0 00

[(100 – 15 – 3 -5) x 1,000 x 30 x 2/3] – 800K

Share premium – sh. options outs. Salaries expense – share options [(100 – 15 – 3 -0) x 1,000 x 30 x 3/3] – 800K – 740K

920,0 00

800,0 00

740,0 00

920,0 00

Share premium – sh. options outs.

3. Solution: January 1, 20x1: No entry December 31, 20x1: Salaries expense [1,000 x (200 – 8) x 25 x 1/3)] 1,600,000 Share premium – options outstanding 1,600,000 December 31, 20x2: Salaries expense [1,000 x (200 – 8) x 25 x 2/3)] – 1.6M Share premium – options outstanding 1,600,000

1,600,000

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December 31, 20x3: Salaries expense

1,550,000

[1,000 x (200 – 6 – 1 - 3) x 25 x 3/3)] – 1.6M – 1.6M

Share premium – options outstanding 1,550,000

PROBLEM 4: MULTIPLE CHOICE – COMPUTATIONAL 1. C January 1, 20x1: Salaries expense (5 x 1,000 x 60) 300,000 Share premium – options outstanding 300,000 NOTE: There are no vesting conditions. 2. C December 31, 20x1 Salaries expense [(10 -1 -1) x 500 x 60 x ½] Share premium – options outstanding 120,000

120,000

December 31, 20x2 Salaries expense [(10 -1) x 500 x 60 x 2/2] – 120K 150,000 Share premium – options outstanding 150,000

3. A December 31, 20x1: Salaries expense (3.2M x 90% x 1/3) Share premium – options outstanding December 31, 20x2: Salaries expense (3.2M x 96% x 2/3) – 960K Share premium – options outstanding 

960,000 960,000 1,088,000 1,088,000

Cumulative share premium, Dec. 31, 20x2: (960,000 + 1,088,000) = 2,048,000

December 31, 20x3:

Page | 4 Salaries expense [(3.2M x 100% x 3/3) – .96M – 1.088M] Share premium – options outstanding

1,152,000 1,152,000

4. B 20x1: (100 – 6 – 3) x 1,000 x 12 x 1/3 = 364,000 20x2: (100 – 8) x 1,000 x 12 x 2/3 – 364,000 = 372,000 20x3: (100 – 6 – 1 – 2) x 1,000 x 12 x 3/3 – 364K – 372K = 356,000 5. D - The share options vested in 20x2 because the average profit in 20x1 and 20x2 increased by more than 15% [(18% + 14%) ÷ 2 = 16%]. Consequently, no salaries expense is recognized in 20x3.  20x1: 1,000 x (100 – 5 – 6) x 45 x ½ = 2,002,500  20x2: 1,000 x (100 – 5 – 3) x 45 x 2/2 – 2,002,500 = 2,137,500  20x3: 0 6. A 20x1: (100 – 8 – 10) x 1,400 sh. (a) x 45 x 1/3 = 1,722,000 20x2: [(100 – 15) x 1,200 sh. (b) x 45 x 2/3] – 1.722M = 1,338,000 20x3: [(100 – 8 – 5 – 2) x 1,000 sh. (c) x 45 x 3/3] – 1.722M – 1.338M = 765,000 (a)

(21% actual sales increase in 20x1 + 21% expected in 20x2 + 21% expected in 20x3) ÷ 3 = 21% (vesting condition iii) (b)

(21% in 20x1 + 18% in 20x2 + 18% expected in 20x3) ÷ 3 = 19% (vesting condition ii) (c)

(21% in 20x1 + 18% in 20x2 + 6% in 20x3) ÷ 3 = 15% (vesting condition i)

7. D (1,000 x 82 x 45) = 3,690,000

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8. A 20x1: (100 x 92%) x 1,000 x 24 x 1/3 = 736,000 20x2: [(100 – 10) x 1,000 x 24 x 2/3] – 736,000 = 704,000 20x3: [(100 – 5 – 3 – 1) x 1,000 x 24 x 3/3] – 736K – 704K = 744,000

9. B 20x1: (100 – 6 – 3) x 1,000 x 12 x 1/3 = 364,000 20x2: [(100 – 6 - 1) x 1,000 x 12] – 364,000 = 752,000

10.

D

20x1: (100 – 17 - 3) x 1,000 x 24 x 1/3 = 640,000 20x2:  from original value: [(100 – 17 - 3) x 1,000 x 24 x 2/3] – 640,000 = 640,000  from incremental fair value: [(100 – 17 - 3) x 1,000 x (36 – 22) x 1/2] = 560,000 Total salaries expense in 20x2: (640,000 + 560,000) = 1,200,000 20x3:  from original value: [(100 – 17 – 1 - 1) x 1,000 x 24 x 3/3] – 640,000 – 640,000 = 664,000  from incremental fair value: [(100 – 17 – 1 - 1) x 1,000 x (36 – 22) x 2/2] - 560,000 = 574,000 Total salaries expense in 20x3: (664,000 + 574,000) = 1,238,000 Cumulative share premium, Dec. 31, 20x3: (640,000 + 1,200,000 + 1,238,000) = 3,078,000 Reconciliation: Employees who remained until vesting date (100 - 17 - 1 - 1)

No. of share options per employee No. of share options that actually vested

81 1,000 81,000

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Fair value on Jan. 1, 20x1 Incremental fair value from repricing Total fair value Total salaries expense/share premium

2 4 1 4 38 3,078, 000

11. C 20x1: (100 – 30 – 0) x 1,000 x 9 x 1/5 = 126,000; 20x2: [(100 – 30 – 40) x 1,000 x 9] x 2/3 – 126,000 = 54,000; 20x3: [(100 – 30 – 40 - 0) x 1,000 x 9] x 3/3 – 126,000 54,000 = 90,000

12.

B

Date 1.1.x1 12.31.x1 12.31.x2 12.31.x3

[100 x 1,000 x ₱9 x 1/5)] [(100 - 40) x 1,000 x ₱9 x 2/5)] – 180,000 Reversal of previously recognized amounts

Salaries expense 180,000 36,000 (216,000)

13. C 20x1: (100 – 5) x 1,000 x 9 x 1/5 = 171,000; 20x2: [(100 – 1) x 1,000 x 9 x 2/5] – 171,000 = 185,400; [(100 – 1) x 1,000 x 10 x 1/4] = 247,500; Total salaries expense for 20x2: (185,400 + 247,500) = 432,900

14. D – 1,000 sh. opt. x (20 employees – 2 – 8) x ₱12 x 2/3* = 80,000 * The extension of the vesting period is ignored because it is not beneficial to the employee. November Rain Co. accounts for the grant under the original conditions.

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15.

C

Date 1.1.x1 12.31. x1 12.31. x2 12.31. x3

[10 x 1,000 x ₱30 x 1/3)] [(10 – 2) x 1,000 x ₱30)] – 100,000

Salari es expen se 100,0 00 140,0 00

Cumulative salaries expenses 100,000 240,000

-

-

The salaries expenses that would have been recognized in 20x2 and 20x3 are simply recognized immediately on Dec. 31, 20x2.

PROBLEM 5: FOR CLASSROOM DISCUSSION 1. Solution: May. 21, 20x1 July 5, 20x1

No entry Equipment (cash selling price) Subscribed capital (10,000 x

2,000, 000

₱100)

Share premium July 21, 20x1

Subscribed capital Share capital

1,000, 000

1,000, 000 1,000, 000 1,000, 000

2. Solution: May. 21, 20x1 July 5, 20x1

No entry Equipment (10,000 x ₱192) Subscribed capital (10,000 x

1,920, 000

₱100)

Share premium July 21, 20x1

Subscribed capital Share capital

1,000, 000

1,000, 000 920,00 0 1,000, 000

Page | 8

3. Solution: Jan. Salaries expense (1,000 x 10 x ₱50) 1, Share premium - sh. options 20x outstanding 1

500,0 00

500,0 00

4. Solution: Jan . 1, 20x 1 De c. 31, 20x 1 De c. 31, 20x 2 De c. 31, 20x 3

Memo entry Salaries expense – share options (10 – 3) x 1,000 x 21 x 1/3 Share premium – sh. options outstanding Salaries expense – share options [(10 – 2 – 1 - 1) x 1,000 x 21 x 2/3] – 49,000 Share premium – sh. options outstanding Salaries expense – share options [(10 - 2 - 1 - 0) x 1,000 x 21 x 3/3] 49K - 35K Share premium – sh. options outstanding

49,00 0 49,00 0 35,00 0 35,00 0 63,00 0 63,00 0

5. Solution: Jan . 1, 20 x1 De c. 31, 20 x1 De c. 31, 20 x2 De c. 31,

Memo entry Salaries expense – share options (10 – 1 - 2) x 1,000 x 21 x 1/3 Share premium – sh. options outstanding Salaries expense – share options [(10 – 1 – 0 - 2) x 1,000 x 21 x 2/3] – 49,000 Share premium – sh. options outstanding Salaries expense – share options [(10 – 1 – 0 - 1) x 1,000 x 71(a) x 3/3] – 49K – 49K

49,00 0 49,00 0 49,00 0 49,00 0 470,0 00

Page | 9 20 x3

470,0 00

Share premium – sh. options outstanding

(a)

[(18% + 19% + 23%) ÷ 3] = 20% average increase. Therefore, the exercise price decreases to ₱50 and the fair value per share option increases to ₱70.

6. Solution: Jan . 1, 20x 1 De c. 31, 20x 1 De c. 31, 20x 2 De c. 31, 20x 3

Memo entry Salaries expense – share options (10 – 1 - 1) x 1,000 x 21 x 1/3 Share premium – sh. options outstanding Salaries expense – share options [(10 – 3) x 1,000 x 21 x 2/3] – 56,000 Share premium – sh. options outstanding Salaries expense – share options [(10 – 1 – 1 - 0) x 1,000 x 21 x 3/3] – 56K – 42K

56,00 0 56,00 0 42,00 0 42,00 0 70,00 0 70,00 0

Share premium – sh. options outstanding

NOTE: Because the share price target is a market condition, it makes no difference whether it is achieved. The salaries expenses as computed are nonetheless recognized. The reason for this is that the fair value estimate has already taken into account the possibility that the share price target will not be achieved. 7. Solution: Jan . 1, 20 x1 De c. 31, 20 x1 De c. 31,

Memo entry Salaries expense – share options (10 – 1 - 2) x 1,000 x 21 x 1/3 Share premium – sh. options outstanding Salaries expense – share options Share premium – sh. options outstanding

49,00 0 49,00 0 63,00 0(a)

63,00

P a g e | 10 20 x2 De c. 31, 20 x3

0(a) Salaries expense – share options Share premium – sh. options outstanding

88,00 0(b)

88,00 0(b)

(a) The salaries expense in 20x2 is computed as follows: Salaries expense on original value of equity instruments granted: [(10 – 3) x 1,000 x 21 x 2/3] – 49,000 49,000 Salaries expense on incremental fair value from repricing: (10 – 3) x 1,000 x (₱12 - ₱8) x 1/2* 14,000 Salaries expense in 20x2 63,000

* 20x2 and 20x3

(b)

The salaries expense in 20x3 is computed as follows: Salaries expense on original value of equity instruments granted: [(10 – 1 – 1 - 0) x 1,000 x 21 x 3/3] – 49,000 – 70,000 49,000 Salaries expense on incremental fair value from repricing: [(10 – 1 – 1 - 0) x 1,000 x (₱12 - ₱8) x 2/2] – 18,000 14,000 Salaries expense in 20x3 88,000 8. Solution:

Jan . 1, 20x 1 De c. 31, 20x 1 De c. 31, 20x 2

Memo entry Salaries expense – share options (10 – 1 - 2) x 1,000 x 21 x 1/3 Share premium – sh. options outstanding Salaries expense – share options [(10 – 3) x 1,000 x 21 x 2/3] – 49,000 Share premium – sh. options outstanding

49,00 0 49,00 0 49,00 0

49,00 0

P a g e | 11 De c. 31, 20x 3

Salaries expense – share options [(10 – 1 – 1 - 0) x 1,000 x 21 x 3/3] – 49K – 49K

70,00 0

70,00 0

Share premium – sh. options outstanding

NOTE: The modification is ignored because adding an exercise price, when originally there was none (i.e., free), is not beneficial to the employee (this is also evidenced by the decrease in the fair value per share option). The grant is accounted for under the original conditions. 9. Solution: Jan . 1, 20 x1 De c. 31, 20 x1 De c. 31, 20 x2

10.

Memo entry Salaries expense – share options (10 – 0) x 1,000 x 21 x 1/3 Share premium – sh. options outstanding Salaries expense – share options [(10 – 1) x 1,000 x 21] – 70,000 Share premium – sh. options outstanding

70,00 0 70,00 0 119,0 00

119,0 00

Solution:

Jan . 1, 20x 1 De c. 31, 20x 1 De c. 31, 20x 2

Salaries expense – share options [10 x 1,000 x 70% x (41 – 20) x 1/3] Share premium – sh. options outstanding Salaries expense – share options

De c. 31, 20x 3

[(10 – 2 – 0 – 2) x 1,000 x (42 – 20) x 3/3] – 49K – 35K

Memo entry

[(10 – 2 – 0 – 1) x 1,000 x (38 – 20) x 2/3] – 49K

Share premium – sh. options outstanding Salaries expense – share options Share premium – sh. options

49,00 0 49,00 0 35,00 0

48,00 0

35,00 0

48,00 0

P a g e | 12 outstanding...