ACC 221 – Intermediate Accounting 3

Share Based Compensation- Share Options

Discussion Questions
JMF, CPA

1. For transactions with employees and others providing similar services, the fair
value of the equity instrument granted is measured on
a. Exercise date
b. Grant Date
c. End of Reporting Period
d. Beginning of the year of grant
Suggested Answer: B

2. It is a contract that gives the holder the right, but not the obligation, to subscribe
to the entity’s share at a fixed or determinable price for a specified period of time.
a. Share option
b. Share warrant
c. Share appreciation right
d. Share spilt
Suggested Answer: A

3. If the share options do not vest until the employee complete a specified service
period, the compensation is
a. Not recognized as expense
b. Recognized as expense immediately
c. Recognized as expense over the service or vesting period.
d. Recognized as expense over a reasonable period not exceeding 10 years.
Suggested Answer: C

4. In what circumstances is compensation expense immediately recognized under a

share option plan?
a. In all circumstances.
b. In circumstances when the options are exercisable within two years for
services rendered over the next two years.
c. In circumstances when the options are granted for prior services and the
options are immediately exercisable.
d. In no circumstances is compensation expense immediately recognized.
Suggested Answer: C

5. Which of the following statements is/are incorrect if there is an acceleration of

vesting?
I. The entity shall recognize immediately the compensation expense that
otherwise would have been recognized for services received over the remainder
of the vesting period.
II. Any payment made to the employees on the cancellation or settlement of the
grant shall be accounted for as repurchase of equity interest and any payment in
excess of the fair value of share options shall be recognized as expense.
a. I only
b. II only
c. Both I and II
d. Neither I nor II
Suggested Answer: D
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Problem 1

On January 1, 2019, Hannah Company granted share options to each of the 100
employees. The share options will vest at the end of 2021, provided the
employees remain in the entity’s employ and provided the sales increase at least
by an average of 5% per year.

If the sales increase by an average of at least 5% per year, each employee shall
receive 100 share options. If the sales increase by an average of at least 10%
per year, each employee shall receive 200 share options, if the sales increase by
an average of at least 15% per year, each employee shall receive 300 share
options.

The fair value of share option is P30. No employees have left during the three-
year vesting period. The sales during the vesting period increased 8% in 2019,
10% in 2020 and 18% in 2021.

Required:

a. Compute for the compensation expense to be recognized in 2019, 2020, and

2021.
b. Assuming that the employees did not exercise the share option, how much is
the amount to be credited to share premium?
c. Assuming that the par value of shares to be issued is P50 and the issue price
is P60, how much is to be credited to share premium?

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Suggested Answers:

Requirement A
2019
Number of Employees 100
Multiply by number of options per employees 100
Total Share Options 10,000
Multiply by Fair Value 30.00
Total Compensation 300,000.00
Divided by 3 years 3
Compensation Expense for 2019 100,000.00

Note: The employees are entitled to 100 share options each

because the sales increased by 8% in 2019.

2020
Number of Employees 100
Multiply by number of options per employees 100
Total Share Options 10,000
Multiply by Fair Value 30.00
Total Compensation 300,000.00
Divided by 3 years 3
Multipply by 2 years 2
Cumulative Compensation for 2020 200,000.00
Less: Compensation Expense recognized in 2019 100,000.00
Compensation Expense for 2020 100,000.00

Note: The employees are entitled to 100 share options each

because the sales increased by an average of 9% (8%+10%/2) in 2020.

2021
Number of Employees 100
Multiply by number of options per employees 200
Total Share Options 20,000
Multiply by Fair Value 30.00
Total Compensation 600,000.00
Less: Cumulative Compensation Expense in 2020 200,000.00
Compensation Expense for 2021 400,000.00

Note: The employees are entitled to 200 share options each

because the sales increased by an average of 12% (8%+10%+18%/3) in 2021.

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 Requirement B
Share Options Outstanding Recorded in :
2019 100,000.00
2020 100,000.00
2021 400,000.00
Amount to be credited to SP 600,000.00

Requirement C
Cash (20, 000 x 60) 1,200,000.00
Share Options Outstanding 600,000.00
Ordianry Share Capital (20, 000 x 50) 1,000,000.00
Share Premium 800,000.00

Problem 2

On January 1, 2019, Charm Company granted 10, 000 share options to the chief
executive officer; conditional upon the executive officer, conditional upon the
executive’s remaining in the entity’s employ until the end of 2021. The par value
per share is P50 and the exercise price is P120.

However, if earnings increase by at least an average of 10% per year over the
three-year period, the exercise price is P90.On January 1, 2019 the entity
estimated that the fair value of the share option is P45 if the exercise price is
P90. If the exercise price is P120, the fair value of the share option is P40.

The earnings of the entity increased over the three-year period as follows:

2019 10%
2020 11%
2021 3%

The share options were exercised on December 31, 2021.

Required:

1. Compute the compensation expense for 2019, 2020 and 2021 as a result
of the share options.
2. Prepare journal entries to record the share options each year and the
exercise of the share options on December 31, 2021.

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Suggested Answers:

2019
Total Share Options 10,000
Multiply by Fair Value 45.00
Total Compensation 450,000.00
Divided by 3 years 3
Compensation Expense for 2019 150,000.00

2020
Total Share Options 10,000
Multiply by Fair Value 45.00
Total Compensation 450,000.00
Divided by 3 years 3
Multiply by 2 years 2
Cumulative Compensation Expense in 2020 300,000.00
Less: Recognized in 2019 150,000.00
Compensation Expense in 2020 150,000.00

2021
Total Share Options 10,000
Multiply by Fair Value 40.00
Total Compensation 400,000.00
Less: Cumulative Compensation Expense in 2020 300,000.00
Compensation Expense in 2021 100,000.00

2019
Salaries- Share Options 150,000.00
Share Options Outstanding 150,000.00

2020 Salaries- Share Options 150,000.00

Share Options Outstanding 150,000.00

2021 Salaries- Share Options 100,000.00

Share Options Outstanding 100,000.00

Cash (10, 000 x 120) 1,200,000.00

Share Options Outstanding 400,000.00
Ordinary Share Capital (10, 000 x 50) 500,000.00
Share Premium 1,100,000.00

End of Discussion

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