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PROBLEMS IN FINANCIAL
ACCOUNTING
WITH SUGGESTED
SOLUTIONS
A Partial Requirement in XACRE1
Submitted by:
John Kenneth M. Gonzales
Submitted to:
Mr. Adriano M. Aguarin Jr.
October 3, 2016
Suggested Solution:
Share options
Multiply by: fair value of options
Total compensation
Multiply by: ratio of vesting period
Cumulative compensation expense
Less: prior years' compensation expense
Current years compensation expense
2016
3,000
P28
P84,00
0
1/3
P28,000
0
P28,000
2017
3,000
P28
P84,00
0
2/3
P56,000
P28,000
P28,000
2018
3,000
P28
P84,00
0
3/3
P84,000
P56,000
P28,000
K Company grants 250 share options each to its 400 employees at the beginning of
2016. The grant is conditional upon the employee working for the company over the
next three years. The company estimates that the fair value of the share options at
grant date is P18 per option.
The company estimates based on a weighted average probability that 15% of the
employees will resign during the three-year period. 33 employees resigned during 2016.
The company adjusts its estimate of employee resignation from 15% to 12%. A further
22 employees resigned during 2017. The company adjusts its estimate of employee
resignation from 12% to 10%. 11 employees resigned during 2018.
4. What is the compensation expense in 2016?
5. What is the compensation expense in 2017?
6. What is the compensation expense in 2018?
Suggested Solution:
4.)
No. of employees
Multiply by: % of employees who will not resign
No. of employees entitled to share options
Multiply by: share options per employee
Total share options
Multiply by: fair value of share option
Total compensation
Multiply by: ratio of vesting period
Compensation expense in 2016:
400
88%
352
250
88,000
P18
P1,584,000
1/3
P528,000
5.)
No. of employees
Multiply by: % of employees who will not resign
No. of employees entitled to share options
Multiply by: share options per employee
Total share options
Multiply by: fair value of share option
Total compensation
Multiply by: ratio of vesting period
Cumulative compensation expense in 2017
Less: compensation expense in 2016
Compensation expense in 2017
400
90%
360
250
90,000
P18
P1,620,000
2/3
P1,080,000
P528,000
P552,000
6.)
No. of employees
400
66
334
250
83,500
P18
P1,503,000
3/3
P1,503,000
P1,080,000
P423,000
Suggested Solution:
2015
700
2016
700
2017
700
22
47
631
37
23
640
65
2015
No. of employees entitled to share
options
Multiply by: share options per
employee
Total share options
Multiply by: fair value of option
Total compensation
Multiply by: ratio of vesting period
Cumulative compensation expense
Less: prior years' compensation
expense
Current year's compensation
expense
2016
63
1
15
0
94,65
0
P20
P1,893,0
00
1/3
P631,0
00
0
P631,0
00
64
0
15
0
96,00
0
P20
P1,920,0
00
2/3
P1,280,0
00
P631,0
00
P649,0
00
635
2017
63
5
15
0
95,25
0
P17
P1,619,2
50
3/3
P1,619,2
50
P1,280,0
00
P339,2
50
At the end of 2018, 50 employees exercise their share appreciation rights and 35
employees exercise theirs at the end of 2019. The remaining employees exercise their
share appreciation rights at the end of 2020.
The company estimates that the fair value of the share appreciation rights at the end of
each year in which a liability exists as shown below. At the end of 2018, all share
appreciation rights held by the employees vested. The intrinsic values of the share
appreciation rights at the date of exercise at the end of 2018, 2019, and 2020 are also
shown below:
Year
2016
2017
2018
2019
2020
Fair Value
P18
P20.5
P22.5
P24
Intrinsic Value
P18.5
P28
P30.5
Suggested Solution:
12.)
No. of employees (150-7-18)
Share appreciation rights per employee
Total share appreciation rights
Multiply by: fair value
Total fair value
Compensation expense in 2016
125
500
62,500
P18
P1,125,000
x 1/3
P375,000
130
500
65,000
20.5
P1,332,500
x 2/3
P888,333
P375,000
P513,333
42,500
P22.5
P956,250
P888,333
P67,917
25,000
P18.5
P462,500
P530,417
15.)
Share Appreciation rights not yet exercised (50x500)
Multiply by fair value
Accrued liability - Dec. 31, 2019
Less: Accrued liability - Dec. 31, 2018
Decrease in accrued liability
25,000
P24
P600,000
P956,250
(P356,250)
17,500
P28
P490,000
P133,750
16.)
Share appreciation rights exercised (50x500)
Multiply by: intrinsic value
Total payment in 2020
Less: Accrued liability - Dec. 31, 2019
Compensation expense in 2020
25,000
P30.5
P762,500
P600,000
P162,500
Suggested Solution:
17.)
Fair value of share alternative (15,000 x 38)
Less: Fair value of liability on grant date (12,000 x 32)
Equity component
18.)
Share basis
Multiply by: fair value
Total Liability
Compensation expense - liability component
Compensation expense - equity component (186,000 / 3)
Total compensation expense in 2015
P570,000
P384,000
P186,000
12,000
P34
P408,000
x 1/3
P136,000
P62,000
P198,000
19.)
Share basis
Multiply by: fair value
Total Liability
Accrued liability - Dec. 2016
Less: Accrued liability - Dec. 2015
Compensation expense - liability component in 2016
Compensation expense - equity component (186,000 / 3)
Total compensation expense in 2016
20.)
Share basis
Multiply by: fair value
Total Liability
Accrued liability - Dec. 2017
Less: Accrued liability - Dec. 2016
Compensation expense - liability component in 2016
Compensation expense - equity component (186,000 / 3)
Total compensation expense in 2017
12,000
P39
P468,000
x 2/3
P312,000
P136,000
176,000
62,000
374,000
12,000
P42
P504,000
x 3/3
P504,000
P312,000
P192,000
P62,000
P254,000