Self-constructed problems in financial accounting with suggested solutions

SELF-CONSTRUCTED
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
Problem 1 (Share-based Compensation)

On January 1, 2016, J Company grants its operations manager 3,000 share options.
The grant is conditional upon the operations manager remaining in the companys
employ until the end of 2018. However, the share options cannot be exercised unless
the share price has increased from P65 on January 1, 2016 to above P80 at the end of
2018. If the share price is above P80 at the end of 2018, the share options can be
exercised any time during the next three years up to the end of 2021.
The company takes into account the possibility that the share price will exceed P80 at
the end of 2018 thus the share options become exercisable and the possibility that the
share price will not exceed P80 at the end of 2018 thus the share options will be
forfeited. The company estimates that the fair value of the share options at grant date is
P28 per option.
1. What is the compensation expense in 2016?
2. What is the cumulative compensation expense in 2017?
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
1. Compensation expense in 2016: P28,000

2. Cumulative compensation expense for 2017: P56,000
3. Compensation expense for 2018: 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.
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
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
Total share options
Total compensation
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
Less: Number of employees that resigned

Total share options
Total compensation
Cumulative compensation expense in 2018
Less: compensation expense in 2016 and 2017
66
334
250
83,500
P18
P1,503,000
3/3
P1,503,000
P1,080,000
P423,000

At the beginning of 2015, M Company granted 150 share options each to its 700
employees. The grant is conditional upon the employees remaining in the companys
employ during a vesting period of three years.
The company estimated the exercise price at grant date to be P75. However, the
exercise price drops to P60 if the companys earnings will increase by at least an
average of 12% per year over the three-year period.
The company estimates that the fair value of the share options on grant date is P20 per
option if the exercise price is P60. And if the exercise price is P75, the company
estimates that the fair value of the share options is P17 per option.
During 2015, the companys earnings increased by 14%. And 22 employees left during
this year and the company expects on the basis of weighted average probability that a
further 47 employees will leave the company during 2016 and 2017.
During 2016, the companys earnings increased by 16% and 15 employees have left
and the company expects that a further 23 employees will leave during 2017.
During 2017, the companys earnings increase by only 8%. By the end of 2017, 28
employees have left the company.
7. What is the compensation expense for 2015?
8. What is the expected number of employees entitled to share options in 2016?
9. What is the cumulative compensation expense for 2016?
11. What is the cumulative compensation expense for 2017?
Suggested Solution:
No. of employees at grant date

Less:
Actual number of resignations
Expected number of resignations
Employees entitled to share options
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
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
7. Compensation expense for 2015: P631,000

8. Expected number of employees entitled to share options in 2016: 640
9. Cumulative compensation expense for 2016:P1,280,000
10. Compensation expense in 2017: P339,250
11. Cumulative compensation expense for 2017: P1,280,000
On January 1, 2016, G Company grants 500 share appreciation rights each to its 150
employees on the condition that the employees will stay in the company for the next
three years.
During 2016, 7 employees leave and the company estimates that a further 18
employees will leave during 2017 and 2018. During 2017, 5 employees and the
company estimates that a further 8 employees will leave during 2018. 3 employees
leave during 2018.
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

14. What amount of accrued salaries should the company report at the end of year
2018?
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
No. of employees (150-7-5-8)

Share appreciation rights per employee
Total share appreciation rights
Total fair value
Accrued Liability - Dec.31, 2017
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
Less: Compensation expense in 2016

P375,000
P513,333
13.) and 14.)

Share Appreciation rights not yet exercised (85x500)
Multiply by fair value
Accrued liability - Dec. 31, 2018
Less: Accrued liability - Dec. 31, 2017
Compensation expense related to right not yet exercised
42,500
P22.5
P956,250
P888,333
P67,917
Share appreciation rights exercised (50x500)

Multiply by: intrinsic value
Compensation paid for rights already exercised
25,000
P18.5
P462,500
Total compensation expense for 2018
P530,417
15.)
Share Appreciation rights not yet exercised (50x500)
Multiply by fair value
Accrued liability - Dec. 31, 2019
Decrease in accrued liability
25,000
P24
P600,000
P956,250
(P356,250)

Compensation paid for rights already exercised
17,500
P28
P490,000
Total compensation expense for 2018
P133,750
16.)
Total payment in 2020
25,000
P30.5
P762,500
P600,000
P162,500

On January 1, 2015, JK Company grants to its executive the right to choose either cash
payment equal to the value of 12,000 phantom shares, or 15,000 shares upon the
condition that the executive will complete three years of service. If the executive
chooses the share alternative, the share must be held for three years after the vesting
period.
The par value of the share is P20 and the share price at grant date is P32.The share
price during the vesting period is P34, P39, and P42 on December 31, 2015, December
31, 2016, and December 31, 2017 respectively.
After taking into consideration the effects of the post-vesting transfer restrictions, the
entity estimates that the fair value of the share alternative is P38 per share at grant
date.
17. What is the equity component on January 1, 2015 arising from the share-based
payment with cash and share alternative?
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
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
Total Liability
Accrued liability - Dec. 2016
Less: Accrued liability - Dec. 2015
Compensation expense - liability component in 2016
20.)
Share basis
Total Liability
Accrued liability - Dec. 2017
Less: Accrued liability - Dec. 2016
Compensation expense - liability component in 2016
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

Self-constructed problems in financial accounting with suggested solutions

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Self-constructed problems in financial accounting with suggested solutions

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SELF-CONSTRUCTED

Problem 1 (Share-based Compensation)

1. Compensation expense in 2016: P28,000

Problem 2 (Share-based Compensation)

Less: Number of employees that resigned

Problem 3 (Share-based Compensation)

No. of employees at grant date

7. Compensation expense for 2015: P631,000

12. What is the compensation expense in 2017?

No. of employees (150-7-5-8)

Less: Compensation expense in 2016

13.) and 14.)

Share appreciation rights exercised (50x500)

Total compensation expense for 2018

Share appreciation rights exercised (35x500)

Total compensation expense for 2018

Problem 5 (Share-based Compensation)

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