Department of Accountancy

Financial Accounting and

Reporting 1st Term, AY 2024-2025
ACYFAR4
Practice Set Part 1
Lessee Accounting, Shareholders’ Equity, Share-based Compensation

Illustrative 1: On January 1, 2027, BINI AIAH Company leased a machinery for 4 years. The
useful life of the machinery is 5 years. The lease is at annual rental or fixed payment of P
100,000 payable at the end of each year. The implicit rate of interest is 12%. The lease
provides for a transfer of ownership of the underlying asset to the lessee at the end of
the lease term.

Required:
1. What is the initial lease liability?
2. What is the cost of the right of use asset?
3. How much is the depreciation expense for the year 2027?
4. How much is the depreciation expense for the year 2028?
5. How much is the interest expense for the year 2027?
6. How much is the interest expense for the year 2028?
7. How much is the carrying amount of the right of use asset at the end of 2027?
8. How much is the carrying amount of the right of use asset at the end of 2028?
9. How much is the carrying amount of the lease liability at the end of 2027?
10. How much is the carrying amount of the lease liability at the end of 2028?

Illustrative 2: BINI AIAH Company leased an equipment on January 1, 2027 with the
following information:

Fixed Annual Payment in advance at the beginning of each lease P 1,000,000

year
Payment to lessor to obtain a long-term lease at inception date 224,000
Estimated cost of restoring the asset at the end as required by 708,591.67
contract
Annual executory cost paid 50,000
Initial Direct Cost Paid on January 1, 2032 250,000
Lease Incentive Received 150,000
Residual Value Guarantee 300,000
Lease Term 6 years
Useful life of equipment 8 years
Implicit interest rate 10%

Required:
11. What is the cost of the right of use asset?
12. How much is the depreciation expense for the year 2027?
13. How much is the interest expense for the year 2027?
14. How much is the carrying amount of the right of use asset at the end of 2027?
15. How much is the carrying amount of the lease liability at the end of 2027?
16. How much is the loss on finance lease if the fair value of the equipment on December
31, 2025 is only P 250,000.
17. How much is the gain on finance lease if the fair value of the equipment on December
31, 2025 is P 350,000.

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Illustrative 3: BINI AIAH Company purchased an equipment that it had been leasing under
a finance lease for P 4,000,000.

The balances of certain accounts on the date of actual purchase are as follows:
Right of Use Asset P
5,000,000
Accumulated Depreciation 1,500,000
Lease Liability 3,800,000

18. What is the cost of the equipment purchased?

Illustrative 4: On January 1, 2027, share options are granted to employees to purchase

80,000 ordinary shares of P 50 par value at P 60 per share. On this date, the fair value
of each share option is P 15. The options are VESTED IMMEDIATELY, meaning the
employees can exercise the options immediately. Employees exercised all their share
options on December 31, 2027.

19. How much is the compensation expense for the year ended December 31, 2027?

Illustrative 5: On January 1, 2027, an entity granted 300 share options each to 400
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 P 30.

By December 31, 2027, 20 employees have left and it is expected that on the basis of a
weighted average probability, a further 25 employees will leave during the vesting
period.

By December 31, 2028, 27 employees have left and the entity expects that a further 30
employees will leave during 2029.

By December 31, 2029, 25 employees have left.

20. How much is the compensation expense for the year ended December 31, 2027?
21. How much is the compensation expense for the year ended December 31, 2028?
22. How much is the compensation expense for the year ended December 31, 2029?

Illustrative 6: On January 1, 2027, an entity granted to an executive 20,000 share options

to purchase 20,000, P 50 par value shares at P 100 per share, conditional upon the
executive’s remaining in the entity’s employ until December 31, 2029. If the earnings
increase by at least an average of 10% per year over the three-year period, the exercise
price will drop to P 80 per share. On grant date, fair value of the share options is P 30 if
the exercise price is P 80 and P 25 if the exercise price is P 100.

During 2027 and 2028, the earnings increased by 12% and 11%, respectively but during
2029, earnings increased only by 4%.

23. How much is the compensation expense for the year ended December 31, 2027?
24. How much is the compensation expense for the year ended December 31, 2028?
25. How much is the compensation expense for the year ended December 31, 2029?

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Illustrative 7: An entity granted a share appreciation right to the general manager on
January 1, 2027. After a four year service period, the employee is entitled to receive cash
equal to the appreciation in share price over the market value on January 1, 2027 based
on 20,000 shares. Exercise date is January 1, 2031. The quoted prices of the entity’s
share are:
January 1, 2027 P 200
December 31, 2027 210
December 31, 2028 220
December 31, 2029 240
December 31, 2030 250

26. How much is the compensation expense for the year ended December 31, 2027?
27. How much is the compensation expense for the year ended December 31, 2028?
28. How much is the compensation expense for the year ended December 31, 2029?
29. How much is the compensation expense for the year ended December 31, 2030?

Illustrative 8: On January 1, 2027, an entity granted to an employee the right to choose

either:
a. Share alternative – equal to 12,000 shares
b. Cash alternative – cash payment equal to the market value of 10,000 phantom
shares

The grant is conditional upon the completion of three years of service. If the employee
chooses the share alternative, the shares must be hald for three years after the vesting
date.

The par value of the share is P 25 and at grant date on January 1, 2027, the share price
is P 51. The share prices for the three year vesting period are P 54, P 60, and P 65 on
December 31, 2027, December 31, 2028, and December 31, 2029, respectively.

After taking into account the effects of post vesting restrictions, the entity has estimated
that the fair value of the share alternative is P 48 per share.

30. How much is the compensation expense for the year ended December 31, 2027?
31. How much is the compensation expense for the year ended December 31, 2028?
32. How much is the compensation expense for the year ended December 31, 2029?

Illustrative 9: At the beginning of 2023, German Company was organized with authorized
capital of 100,000, P200 par value shares.

January 15 Issued 10,000 shares at P280 per share.

May 1 Issued 5,000 shares in exchange for land with a fair value of
P1,200,000. On this date, fair value of the shares was P250 per
share.
November Issued 2,000 shares for legal services when the fair value was
23 P260 per share.

33. What amount should be reported as share capital?

A. 3,400,000 C. 4,520,00
0
B. 3,600,000 D. 4,570,00
0

34. What amount should be reported as share premium?

A. Zero C. 1,120,00
0
B. 1,000,000 D. 1,170,00
0

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Illustrative 10: The Beltran Company had 50,000 of P30 par value ordinary shares on
January 1, 2023. During 2023, the following transactions pertaining to its ordinary
shares occurred:
 Purchased 2,500 shares as treasury at P60 each.
 The ordinary share was split 3-for-1.
 Reissued 1,500 treasury shares at P28 each.

35. What amount was credited to share premium upon reissuance of the 1,500 treasury
shares?
A. Zero. C. P42,000
B. P12,000 D. P48,000

36. What is the total cost of the remaining treasury shares at the end of 2023?
A. Zero. C. P108,00
0
B. P60,000 D. P120,00
0

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