CHAPTER 28

SHARE-BASED COMPENSATION

Problem 28-1
On January 1, 2023, Ward Company granted share options of 100,000 shares at an option price of
P40 per share as additional compensation for services to be rendered over the next three years.
The options are exercisable during a one-year period beginning January 1, 2026, by grantee still
employed by the entity.
Market price of share was P45 at the grant date. The par value per share is P30.
The fair value of the share option is P15 on grant date. All share options were exercised during
2026.

1. What amount should be reported as compensation expense for 2023?

2. What amount should be recognized as share premium upon exercise of the share options in
2026?

Solution refers to Problem 28-1 page 363

Problem 28-2 (AICPAAdapted)

On January 1, 2023, Oak Company granted share options to certain key employees as additional
compensation.
The options were for 100,000 ordinary shares of P 10 par value at an option price of P15 per
share.
Market price of this share on January 1, 2023 was P20. The fair value of each share option on
January 1, 2023 is P8.
The options were exercisable immediately beginning January 1, 2023 and expire on December
31, 2024. On December 31, 2023, all share options were exercised.

1. What amount of compensation expense should be reported in 2023?

2. What amount should be recognized as share premium upon exercise of the share options on
December 31, 2023?

Solution refers to Problem 28-2 page 364

Problem 28-3
On June 30, 2023 Newman Company granted compensatory share options for 30,000 P20 par
value ordinary shares to certain key employees. The market price of the share on that date was
P36 and the option price was P30.
The Black-Scholes option pricing model measured the total compensation expense at P5,400,000.

The options are exercisable beginning January 1, 2026, provided the key employees are still in
entity's employ at the time the options are exercised. The options expire on June 30, 2027.
On January 15, 2026, when the market price of the share was P42, all 30,000 options were
exercised.

1. What amount should be reported as compensation expense for 2023?

2. What amount should be recognized as share premium upon exercise of share options in 2026?

Solution refers to Problem 28-3 page 365

Problem 28-4
On January 1, 2023, Kline Company granted Morgan, the president, compensatory share options
to buy 10,000 ordinary shares of P10 par value.
The options call for a price of P20 per share and are exercisable in 3 years following the grant
date. Morgan exercised the options on December 31, 2023.
The market price of the share was P60 on January 1, 2023, and P70 on December 31, 2023. The
fair value of the share option is P30 on the date of grant.

1. What amount should be reported as net increase in shareholders' equity as a result of the grant
and exercise of the options?

Solution refers to Problem 28-4 page 366

Problem 28-5
On January 1, 2023. Vicar Company initiated a performance-based employee share option plan
The performance base for the plan is net sales in 2025. The plan provided for share options to be
awarded to the employees as a group on the following basis:

Level Net sales range Option granted

1 P2,500,00 – 5,000,00 20,000
2 P5,000,000 – 10,000,000 30,000
3 More than 10,000,000 40,000

The options become exercisable on January 1, 2026. The options were exercised on December
31, 2026. The option exercise price is P200 per share and the par value is P100 per share. On
January 1,2023, each option had a fair value of P90.
The actual sales achieved totaled P4,500,000 in 2023, P5,500,000 in 2024 and P7,000,000 in
2025.

1. What amount should be recognized as compensation expense for 2024?

2. What amount should be reported as compensation expense for 2025?
3. What amount should be credited to share premium upon exercise of the share options on
December 31, 2026?
Solution refers to Problem 28-5 page 368

Problem 28-6
Roxanne Company has granted share options to the employees. The total compensation expense
to the vesting date of December 31, 2026 has been calculated at P8,000,000. The entity has
decided to see the award early on December 31, 2025. The compensation to settle charged since
the date of grant on January 1, 2023 was P2,000,000 for 2023 and P2,100,000 for 2024. The
compensation expense that would have been charged in 2025 was P2,200,000.

1. What amount should be reported as compensation for 2025?

2. What amount should be reported as compensation expense for 2025 if the share options are not
exercised but instead the entity paid P7,500,000 to the employees?
Solution refers to Problem 28-6 page 369

Problem 28-7
Rose Company granted 150,000 share options to employees with a fair value of P6,000,000. The
options vest in three years and exercisable within one year from vesting date.
The Monte Carlo model was used to value the options. The option price is P80 per share and the
par value is P50.
On January 1, 2023, which is the date of grant, the estimate of employees leaving the entity
during the vesting period is 5%.
On December 31, 2024, the estimate of employees leaving before vesting date is revised to 6%.
On December 31, 2025, only 5% of the employees actually left the entity.
On December 31, 2026, the employees exercised 100,000 share options only when the market
value is P150 per share and the remainder lapsed.

1. What amount should be reported as compensation expense for 20237

2. What amount should be reported as compensation expense for 2024?
3. What amount should be reported as compensation expense for 2025?
4. What amount of share premium should be credited upon exercise of the share options on
December 31, 2026?
Solution refers to Problem 28-7 page 371

Problem 28-8
On January 1, 2023, Kamagong Company granted 100 share options each to 500 employees,
conditional upon the employee's remaining in the entity's employ during the vesting period.
The share options vest at the end of a three-year period. On grant date, each share option has a
fair value of P30.
The par value per share is P100 and the option price is P120.
On December 31, 2024, 30 employees have left and it is expected that on the basis of a weighted
average probability, a further 30 employees will leave before the end of the three-year period. On
December 31, 2025, only 20 employees actually left and all of the share options are exercised on
such date.

1. What amount should be reported as compensation expense for 2023?

2. What amount should be reported as compensation expense for 2024?
3. What amount should be reported as compensation expense for 2025?
4. What amount should be reported as share premium upon exercise of the share options on
December 31, 2025?
Solution refers to Problem 28-8 page 373
Problem 28-9
On January 1, 2023, Paranoid Company granted a senior executive 30,000 share options,
conditional upon the executive's remaining in the entity's employ until December 31, 2025.
The par value per share is P50. The exercise price is P100. If the exercise price is P100, the fair
value of the share option is P25.
However, the exercise price drops to P80 if the entity's earnings increase by at least an average of
10% per year over the three-year period.
On grant date, the entity estimated that the fair value of the share option is P30 if the exercise
price is P80.
During 2023 and 2024, the earnings increased by 11% and 12% respectively. However, during
2025, the earnings increased only by 4%.
All share options were exercised on December 31, 2025.
1. What amount should be recognized as compensation expense for 2025?
2. What amount should be recorded as share premium upon exercise of the share options on
December 31, 2025?
Solution refers to Problem 28-9 page 375

Problem 28-10

On January 1, 2023, Nova Company granted share options to each of the 300 employees
working in the sales department.
The share options vest at the end of a three-year period provided that the employees remain in
the entity's employ and provided the volume of sales will increase by more than 10% per year.
The fair value of each share option on grant date is P30.
The par value per share is P50 and the option price is P60.
If the sales increase by more than 10%, each employee will receive 200 share options.
If the sales increase by more than 15%, each employee will receive 300 share options.
On December 31, 2023, the sales increased by more than 10% but not more than 15%, and no
employees have left the entity.
On December 31, 2024, sales increased by more than 15% and no employees have left.
On December 31, 2025, the sales increased by more than 15% and 50 employees left the entity.
All of the share options were exercised on December 31, 2025.

1. What amount should be recognized as compensation expense for 2025?

2. What amount should be recognized as share premium upon exercise of share options on
December 31, 2025?
Solution refers to Problem 28-10 page 377

Problem 28-11
On January 1, 2023, Cuba Company granted a senior executive 10,000 share options provided
the executive remains in the entity's employ until December 31, 2024.

However, the share options cannot be exercised unless the share price has increased from P50 on
January 1, 2023 to above P65 on December 31, 2024. If the share price is above P65 on
December 31, 2024, the share options can be exercised at any time during the next 5 years.

The entity applied a binomial option pricing model and estimated that the fair value of the share
options with this market condition on grant date is P24 per option.

1. What amount should be reported as compensation expense for 2023?

Solution refers to Problem 28-11 page 378

Problem 28-12

On January 1, 2023, Green Company had issued executive share options permitting executives to
buy 40,000 shares for P25 per share.

The graded-vesting schedule is 20% the first year, 30% the second year and 50% the third year.

Vesting date Amount vesting Fair value per option

December 31, 2023 20% 10
December 31, 2024 30% 15
December 31, 2025 50% 20

1. Assuming the entity used the straight line method, what amount of compensation expense
should be recorded in 2023?

Solution refers to Problem 28-12 page 378

Problem 28-13
Alterra Company granted 60,000 share f employees. The share options will vest at the end of the
options provided the employees remain in service until then. The option is P60 and the par value
per share is P50.

At the date of grant, the entity concluded that the fair value of the share options cannot be
measured reliably.

The share options have a life of 4 years which means that the share options can be exercised
within one year after vesting.

The share prices are P62 on December 31, 2023, P66 on December 31, 2024, P75 on December
31, 2025 and P85 on December 31, 2026.

All share options were exercised on December 31, 2026.

1. What amount should be reported as compensation expense for 2023?

2. What amount should be reported as compensation expense for 2024?

3. What amount should be reported as compensation expense for 2025?

4. What amount should be reported as compensation expense for 2026?

Solution refers to Problem 28-13 page 380

CHAPTER 40
ACCRUAL BASIS

Problem 40-1

Reina Company maintains its books on a cash basis. During the current year, the entity collected
P50,000,000 from customers and paid P42,000,000 in expenses.

Increase
January December 31 (Decrease)
Accounts receivable 2,000,000 1,700,000 (300,000)
Prepaid expenses 200,000 300,000 100,000
Advances from customers 500,000 900,000 400,000
Accrued expenses 1,000,000 800,000 (200,000)
Accounts payable 1,400,000 2,500,000 (200,000)
Depreciation for current year 500,000

1. What amount should be reported as accrual basis net income?

Solution refers to Problem 40-1 page 520

Problem 40-2
Standard Company decided to convert the cash basis financial statements to accrual basis
financial statements:

 A comprehensive insurance policy requires a payment every year for the upcoming year.
The last payment of P 1,200,000 was made on September 1, 2023.
 At the end of the current year, various credit card entities owed Standard Company
P650,000. At the end of last year, customer credit card charges outstanding were
P500,000.
 Employees are paid once a month, on the 10th of the month following the work period.
 Cash disbursements to employees were P800,000 and P700,000 for January 10, 2024 and
January 10, 2023, respectively.
 Utility bills outstanding totaled P100,000 at the end of 2023 and P250,000 at the end of
2022.
 The merchandise on hand at the end of 2023 was P3,500,000 and at the end of 2022,
inventory on hand was P3,200,000.
 At the end of 2022, the entity did not have any bills outstanding to suppliers of
merchandise. However, at the end 2023, the entity owed suppliers P400,000.
 Cash basis net income before depreciation of P100,000 amounted to P2,600,000.

1. What amount should be reported as net income under cash basis?

2. What amount should be reported as net income under accrual basis?

Solution refers to Problem 40-2 page 522

Problem 40-3

Emmyrelle Company provided the following selected accounts, cash receipts and disbursements
for the current year:
December 31 January 1

Accounts receivable 250,000 300,000

Notes receivable 150,000 100,000
Accounts payable 120,000 160,000
Notes payable - trade and non trade 200,000 150,000
Prepaid insurance 30,000 30,000 10,000

Cash receipts for current year

Cash sales 500,000

Collections of accounts, net of discounts of P40,000 1,800,000
Collections of notes receivable 80,000 80,000
Bank loan one-year note, unpaid December 31 100,000
Purchase returns and allowances 60,000 60,000

Cash disbursements for current year

Cash purchases 130,000

Payments of accounts payable, net of discounts of P20,000 1,500,000
Payments of notes payable 400,000
Insurance 220,000
Other expenses 650,000
Sales returns and allowances 50,000

1. Under accrual basis, what amount should be reported as gross sales?

2. Under accrual basis, what amount should be reported as gross purchases?

Solution refers to Problem 40-3 page 524

Problem 40-4

Lake Company reported the following information on January 1, 2023:

Investments in shares
Kar Company, 1,000 shares 100,000
Aub Company, 5.000 shares 1,000,000
Real estate:
Parking lot leased to Day Company 3,000,000
Other:
Trademark 250,000
Total investments 4,350,000

Lake Company owned 1% of Kar Company and 30% of Aub Company. During the year ended
December 31, 2023, Lake Company received cash dividend of P10,000 from Kar Company and
P150.000 from Aub Company whose 2023 net income figures were P750,000 and P1,500,000
respectively.

The Day Company lease, which commenced on January 1, 2023, is for 10 years at an annual
rental of P480,000. Lake Company received P480,000 rent from Day Company in 2023.

In addition, on January 1, 2023 Day Company paid a nonrefundable deposit of P500,000, as well
as a security deposit of P80,000 to be refunded upon expiration of lease.

The trademark was licensed to Barr Company for royalties of 10% of sales of the trademarked
items.

Royalties are payable semiannually on March 1 for sales in July through December of prior year,
and on September 1 for sales in January through June of the same year. Lake Company received
the following royalties from Barr Company:

March 1 September 1
2022 300,000 500,000
2023 400,000 700,000

Barr Company reported that sales of the trademarked items totaled P2,000,000 for the last half of
2023.

1. What amount should be reported for dividend revenue?

2. What amount should be reported for rental revenue?
3. What amount should be reported for royalty revenue?
Solution refers to Problem 40-4 page 526
Problem 40-5
Merill Company has not prepared financial statements for three years since December 31, 2022.
During the three-year period, the cash receipts and cash disbursements were maintained and sales
on account were entered directly into an accounts receivable ledger.
However, no general ledger postings have been made since the December 31, 2022 closing.
The examination of the records disclosed the following balances at the beginning and end of the
three-year period:
December 31, 2022 December 31, 2025
Less than 1 year old 77,000 141,000
1 to 2 years old 6,000 9,000
2 to 3 years old 4,000
Over 3 years old 11,000
______________ ______________
Total accounts receivable 83,000 165,000

Inventory 58,000 94,000

Accounts payable 25,000 55,000

No account balances have been written off during the three-year period. The ratio of gross profit
to sales remains constant from year to year.
Other data available are:
2023 2024 2025
Cash received applied to
Current year 744,000 809,000 1,044,000
Accounts of prior year 67,000 75,000 84,000
Accounts of two years prior 3,000 2,000 10,000
Total collections 814,000 886,000 1,138,000

Cash Sales 85,000 130,000 156,000

Payment of accounts payable 625,000 706,000 1,138,000

Required:
Compute total sales, total purchases, and cost of goods sold for 2023, 2024 and 2025.
Solution refers to Problem 40-5 page 528