SOL. MAN. Chapter 13 Share Based Payments (PART 2) 2021 PDF

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Chapter 13Share-based Payments (Part 2)PROBLEM 1: TRUE OR FALSE1. TRUE2. FALSE3. TRUE4. FALSE5. TRUEPROBLEM 2: MULTIPLE CHOICE – THEORY1. A2. C3. D4. D5. CPROBLEM 3: EXERCISES1. Solution:Jan. 1, 20xMemo entryDec. 31, 20xSalaries expense – SARs [900 x 24 x 1/3] Accrued salaries payable7,7,Dec. 31, 20...

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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 Dec. 31, 20x1 Dec. 31, 20x2 Dec. 31, 20x3 Dec. 31, 20x3

Memo entry Salaries expense – SARs [900 x 24 x 1/3] Accrued salaries payable Salaries expense – SARs [800 x 30 x 2/3] – 7,200 Accrued salaries payable Salaries expense – SARs [750 x 32 x 3/3] – 16,000 Accrued salaries payable Accrued salaries payable Cash (750 x 32)

7,200 7,200 8,800 8,800 8,000 8,000 24,00 0

24,00 0

2. Solution:  Bulldozer Co. has issued a compound financial instrument because the choice of settlement is given

Page | 2 to the counterparty. 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. 134, 400 (120, 000) 14,4 00

Fair value of compound instrument (the greater amount)

Fair value of debt alternative Fair value of equity alternative at grant date

 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)

Total salaries expense - 20x1

48,000 52,8 00

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

Total salaries expense - 20x2

56,000 60,8

Page | 3 00

20x3: Salaries expense related to the equity component: 4,800

(14,400 x 3/3) – 4,800 – 4,800

Salaries expense related to the liability component: 58,000 62,8 00

(1,000 x ₱162 x 3/3) – 48,000 – 56,000

Total salaries expense - 20x3

Journal entries: Jan. 1, 20x1 Dec. 31, 20x1

Dec. 31, 20x2

Dec. 31, 20x3

Memo entry Salaries expense Share premium – sh. options outs. Salaries payable Salaries expense Share premium – sh. options outs. Salaries payable Salaries expense Share premium – sh. options outs. Salaries payable

Settlement Scenario (a) Employee chooses equity.

52,80 0

60,80 0

62,80 0

4,800 48,00 0 4,800 56,00 0 4,800 58,00 0

Scenario (b) Employee chooses cash.

Dec. 31, 20x3:

Dec. 31, 20x3:

Salaries payable 162K Share capital (1,200 x ₱100 par) 120K Share premium 42K

Salaries payable 162K Cash (1,000 sh. x ₱162) 162K

Dec. 31, 20x3:

Dec. 31, 20x3:

Sh. prem. - sh. options outs. 14.4K Share premium 14.4K

Sh. prem. - sh. options outs. 14.4K Share premium 14.4K

to transfer the equity component

to transfer the equity component

Page | 4 directly within equity

directly within equity

PROBLEM 4: MULTIPLE CHOICE – COMPUTATIONAL 1. D (20,000 x 16 x1/2) = 160,000 2. D F Jan. 1, 20x1: 0 F Dec. 31, 20x2: (10,000 SARs x 10 employees x 18 x 2/3) = 1,200,000 F Dec. 31, 20x3: (10,000 x 10 x 20 x 3/3) = 2,000,000 3. C F

F F

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

Page | 5 7. B (720K + 80K ‘see entries below’) = 800K total credit  The liability component is remeasured to fair value as follows: 1,120,0 Fair value of debt component, Dec. 31, 20x1 (10,000 sh. x ₱112) 00 Fair value of debt component, Jan. 1, 20x1 (10,000 (880,00 sh. x ₱88) 0) Loss on remeasurement of liability (increase in liability) 240,000 De c. 31, 20 x1

Loss on remeasurement of liability Accounts payable

240,00 0 240,00 to remeasure the liability to fair value on 0

settlement date

Scenario 1 Equity settlement.

Scenario 2 Cash settlement.

Dec. 31, 20x1:

Dec. 31, 20x1:

Accounts payable 1.120M Share capital (10,000 x ₱40 par) 400K Share premium 720K

Accounts payable Cash 1.120M

1.120M

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 Share premium 80K

Sh. prem. - sh. options outs. 80K Share premium 80K

to transfer the equity component directly within equity

to transfer the equity component directly 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)

84,0 00

Page | 6

Fair value of debt alternative Fair value of equity alternative at grant date

(75,0 00) 9,00 0

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)

Total salaries expense - 20x1

30,000 33,00 0

 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

Total salaries expense - 20x2

35,000 38,00 0

 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

Total salaries expense - 20x3 12. C

35,000 38,0 00

Page | 7 The fair values of the alternatives are determined as follows: 601,05 Fair value of debt component [800K x PV of ₱1 @10%, n=3] 2 Fair value of equity component (given) 8,000 The amortization table for the debt component is prepared as follows: Interest Present Date Discount value expense 198,948 601,052 Jan. 1, 20x1 Dec. 31, 20x1 Dec. 31, 20x2 Dec. 31, 20x3

60,105

138,843

661,157

66,116

72,727

727,273

72,727

0

800,000

Journal entries (before settlement): Jan. Salaries expense (601,052 + 8,000) 1, Salaries payable 20x1 Share premium – options outstanding Dec. 31, Interest expense 20x1 Salaries payable

609,0 52

60,10 5

Dec. 31, 20x2

Interest expense Salaries payable

66,11 6

Dec. 31, 20x3

Interest expense Salaries payable

72,72 7

13. A  Salaries expense in 20x1: Dec. Salaries expense (2,000 x ₱165 x 1/3) 31, Share premium – sh. options 20x1 outstanding

110,0 00

601,0 52 8,000 60,10 5 66,11 6 72,72 7

110,0 00

 Salaries expense in 20x2: Fair value of original instrument at grant date (2,000 x ₱165)

Fair value of debt component (2,000 x ₱125)

330,00 0 (250,00

Page | 8

Fair value of equity component

0) 80,000

Salaries expense related to the equity component: (80,000 newly assigned value x 2/3) – 110,000

(56,66 7)

Salaries expense related to the liability component: (2,000 sh. x ₱125 x 2/3)

Total salaries expense - 20x2

166,66 7 110, 000

 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

Total salaries expense - 20x3

53,333 80,0 00

14. B Tax deduction - intrinsic value - (1.2M x 1/3) Salaries expense (500 x 100 x 30 x 90% x 1/3) Excess tax deduction

400,000 (450,000) -

Tax deduction - intrinsic value - (1.2M x 1/3) Multiply by:

400,000 30%

Tax benefit recognized in profit or loss

120,000

15.C Tax deduction - intrinsic value - (1.5M x 1/3)

500,000

Page | 9 Salaries expense (500 x 100 x 30 x 90% x 1/3)

(450,000)

Excess tax deduction

50,000

Salaries expense Multiply by:

450,000

Tax benefit recognized in profit or loss

135,000

Excess tax deduction Multiply by:

50,000

Tax benefit recognized in OCI

15,000

30%

30%

Optional Reconciliation: Tax benefit recognized in profit or loss

135,000

Tax benefit recognized in OCI

15,000

Total tax benefit Divide by: Tax rate

150,000 30%

Total tax deduction (intrinsic value)

500,000

P a g e | 10 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) Accrued salaries payable 716,800 December 31, 20x2: Salaries expense

716,800

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 Cash 2,328,000

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 Fair value of debt component

(Asset)

(Liability)

(2,000 sh. x ₱220)

Fair value of equity component

(Equity)

Journal entry: Jan Machine . 1, Accounts payable 20x Share premium – sh. options 1 outstanding

on 1/1/x1

500,0 00 (440,00 0) 60,00 0

500,00 0 440,00 0 60,00

P a g e | 11 0

 The liability component is remeasured to fair value as follows: Fair value of debt component, Dec. 31, 20x1 430,000 (2,000 sh. x ₱215) Fair value of debt component, Jan. 1, 20x1 (2,000 (440,000 sh. x ₱220) ) Gain on remeasurement of liability (decrease in liability) (10,000)

Journal entry: De Accounts payable c. Gain on remeasurement of 31, liability 20 x1

10,000 10,000

to remeasure the liability to fair value on settlement date

Journal entries: Scenario 1 Golf Co. chooses equity settlement.

Scenario 2 Golf Co. chooses cash settlement.

Dec. 31, 20x1:

Dec. 31, 20x1:

Accounts payable 430K Share capital (2,000 x ₱100 par) 200K Share premium 230K

Accounts payable Cash 430K

430K

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 Share premium 60K

Sh. prem. - sh. options outs. 60K Share premium 60K

to transfer the equity component directly within equity

to transfer the equity component directly 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

P a g e | 12 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. 1,970, 000 (1,760, 000) 210,0 00

Fair value of compound instrument (the greater amount)

Fair value of debt alternative Fair value of equity alternative at grant date

 The salaries expense in 20x1 is computed as follows: Salaries expense related to the equity component: (210,000 x 1/3) 70,000 Salaries expense related to the liability component: 720,00 0 790, 000

(8,000 x ₱270 x 1/3)

Total salaries expense - 20x1

Journal entry: Jan. 1, 20x1 Dec. 31, 20x1

Memo entry Salaries expense Share premium – sh. options outs. Salaries payable

790,0 00

70,00 0 720,0 00

 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

P a g e | 13

Salaries expense related to the liability component: 560,00 0 630, 000

(8,000 sh. x ₱240 x 2/3) – 720,000

Total salaries expense - 20x2

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

630,0 00

70,00 0 560,0 00

 The salaries expense in 20x3 is computed as follows: Salaries expense related to the equity component: 70,000 (210,00 x 3/3) – 70,000 – 70,000 Salaries expense related to the liability component: 960,000 1,030, 000

(8,000 sh. x ₱280 x 3/3) – 720,000 – 560,000

Total salaries expense - 20x2

Journal entry: Dec. Salaries expense 31, Share premium – sh. options 20x3 outs. Salaries payable Settlement Scenario 1 Employee chooses equity.

1,030, 000

Scenario 2 Employee chooses cash.

Dec. 31, 20x3:

Dec. 31, 20x3:

Salaries payable 2.24M(a) Share capital (10,00 x ₱10 par) 100K Share premium 2.14M

Salaries payable 2.24M(a) Cash (8,000 sh. x ₱280) 2.24M

to record the issuance of equity instrument

70,00 0 960,0 00

to record the payment in cash

P a g e | 14

Dec. 31, 20x3:

Dec. 31, 20x3:

Sh. prem. - sh. options outs. 210K Share premium 210K

Sh. prem. - sh. options outs. 210K Share premium 210K

to transfer the equity component directly within equity

to transfer the equity component directly within equity

(a)

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

Notes:  The components of the compound financial instrument are accounted for separately as liability and equity. F The equity component is not subsequently remeasured; the liability component is remeasured at each year-end. F 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)....