Problem 2

On January 2019, Pandora Corp. granted to 600 employees, 100 share options each exercisable
after 3 years subject to the employees staying with the company until the end above P60 at the
end 2021. The share options can be exercised at any time during the next five years, that is by
the end of 2026. The company estimates takes into account the possibility that the share price
will exceed P60 per share at the end of 2016, thus options are exercisable and the possibility
that the share price will not exceed P60 at the end of 2021, thus the share options will be
forfeited.

The following information are deemed relevant:

Fair value Fair value Actual number of Estimated number of

of Shares of options employees actually additional employees,
leaving the company expected to leave the
during the year company by the end of 2021
Dec. 31, 2019 P48 P4 5 45
Dec. 31, 2020 P44 P 20 35
Dec. 31, 2021 P56 P 30
Requirements:
1. What is the compensation expense in 2019?
a. P100,000 c. P88,333
b. P91,667 d. NONE
2. What is the compensation expense in 2020?
a. P100,000 c. P88,333
b. P91,667 d. NONE
3. What is the compensation expense in 2021?
a. P92,500 c. P88,333
b. P91,667 d. NONE
4. What is the ordinary share options outstanding as of December 31, 2020?

a. P180,000 c. P188,333
b. P191,667 d. NONE
SOLUTION:
1. What is the compensation expense in 2019?
a. P100,000 c. P88,333
Answer is B. P91,667
b. P91,667 d. NONE

Number of options (600-5-45)*100 55,000

Fair value of options on grant date P5
Estimated value of services over 3 years P275,000
Divided by: Vesting period 3 years
Salaries expense, 2019 91,667
SOLUTION:
2. What is the compensation expense in 2020?
a. P100,000 c. P88,333
Answer is C. P88,333
b. P91,667 d. NONE

Number of options (600-5-20-35)*100 54,000

Fair value of options on grant date P5
Estimated value of services over 3 years P270,000
Multiply by: 2/3 2/3
Accumulated salaries expense as of 2019 P180,000
Less: Prior years salaries expense (P91,6667)
Salaries expense, 2020 P88,333
SOLUTION:
3. What is the compensation expense in 2021?
a. P92,500 c. P88,333
Answer is A. P92,500
b. P91,667 d. NONE

Final number of options (600-5-20-30)*100 54,500

Fair value of options on grant date P5
Final value of services over 3 years P272,500
Multiply by: 3/3 3/3
Accumulated salaries expense as of 2021 P272,500
Less: Prior years salaries expense (P180,000)
Salaries expense, 2021 P92,500
SOLUTION:
4. Assuming that 60% of the options granted to employees were exercised, the
entry to record the exercise shall require a credit share premium at:

a. P928,800 c. P309,600 Answer is A. P928,800

b. P925,200 d. P306,000

Cash (15,480*P120) P1,857,600

Ordinary share options outstanding (15,480*40) 619,200
Ordinary shares (15,480*P100) 1,548,000
Share premium 928,800