BATCH 2019

BALIWAG POLYTECHNIC COLLEGE

2ND FLOOR STAR MALL BLDG, POBLACION, BALIWAG, BULACAN FAR 2

FINANCIAL ACCOUNTING AND REPORTING A. Almine

THEORIES

Similarity is that these securities entitle holders to acquire shares at an exercise rate ordinary lower than the prevailing market rate. The
difference however lies on how to account for the issuance, exercise and expiration of such, to wit:

Issuance Exercise Expiration

RIGHTS – are issued to entitle the No entry (memo entry only) Normal entry for issuance of No entry (memo entry only)
general stockholders in relation shares:
to their pre-emptive rights, to 1 right for every 1 stock issued
protect their proportional Cash (Ex. P) XX
interest whenever corporations OS XX
issue fresh new shares. Share Prem XX

WARRANTS – normally issued PS with warrants:

attached to a principal security Cash XX Cash (Ex P) xx OSWO** xx
(Bond or Preference Shares) as PS XX OSWO** xx Share Prem from
an inducement to buyers of the Share Prem XX OS xx Expired warrants xx
principal securities. OSWO XX Share Prem xx

*Use pro-rata or residual **debit OSWO at the carrying

approach value of the warrants exercised.

Bonds with warranrs:

Cash XX
Discount XX (or)
Premium XX
Bonds Payable XX
OSWO XX
*Use residual approach
OPTIONS - normally issued to Comp. exp. xx Cash (Ex P) xx OSOO** XX
key executives and officers as OSOO xx OSOO** xx Share Prem from
additional compensation for At FMV of options or the OS xx Expired options XX
either past or future services intrinsic value, whichever is Share Prem xx
provided to the company. appropriate
**debit OSOO at the carrying
(see note below) value of the options exercised.

PROBLEMS

Problem 1: Prepare all indicated entries for each of the following independent cases affecting shareholders’ equity.

Case 1. Issued 20,000 right to shareholders, 1 right on each share, permitting holders to acquire one ordinary share of P50 par value at P60 with
every 5 rights submitted. Shares are selling at P30 per share at this time.

Subsequently, 25,000 rights are exercised and 5,000 rights expired.

Case 2. Issued P2,000,000 12% face value bonds for P2,600,000 with share warrants – 5 warrants for every P1,000 bond.

Two warrants can be used to acquire one ordinary share par value P50, at P60. The market values on the date of the issuance of the bonds are:

12% bond ex-warrant 120

Warrant P10

Ordinary Share 65

All warrants were subsequently exercised.

Share Rights, Share Warrants and Share

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 BATCH 2019
BALIWAG POLYTECHNIC COLLEGE
2ND FLOOR STAR MALL BLDG, POBLACION, BALIWAG, BULACAN FAR 2

FINANCIAL ACCOUNTING AND REPORTING A. Almine

Case 3: The Company issued 5,000 shares of P25 par preferred stock with detachable warrants. The package of the stock and warrants sells for
P105. Each warrant enables the holder to purchase two shares of P10 par common stock at P30 per share. Immediately following the issuance of
the stock, the stock warrants are selling at P14 each. The market value of the preferred stock without warrants is P96.

Subsequently, 70 percent of the warrants are exercised.

Case 4: Issued 20,000 preference shares of P100 par value for P2,500,000 with 20,000 warrants to acquire 10,000 ordinary shares, P50 par, at P60.
On the date of issuance, the warrants have a market value of P10, but the preference share has no known market value ex-warrant.

Subsequently, 18,000 warrants were exercised and the remainder lapsed.

Case 5: Issued 50,000 preference shares of P100 par value for P6,000,000 with 50,000 warrants to acquire 25,000 ordinary shares, P50 par, at P60
per share. On the date of issuance, the market values are:

Preference share ex-warrant none

Warrant none

Ordinary share 80

Subsequently, all the warrants were exercised.

Problem 2: On January 1, 2013, Easy Company granted 30,000 share options to employees. The share options vest at the end of three years
provided the employees remain in service until then.

The option price is P60 and the share price is also P60 at the date of grant. The par value of the share is P50.

At the date of grant, the entity concluded that the fair value of the share options cannot be estimated reliably.

All share options vested at the end of three years and no employees left during the three-year period.

The share prices and the number of share options exercised are set out below.

Share price

2013 63

2014 66

2015 75

Required: Determine the compensation expense for each year from 2013 to 2015 using the intrinsic value method.

Problem 3: The Fire Red Company granted 100 share option to each of its 200 employees on January 1,2009. The option plan entitles the
employees to buy share of the entity’s P200 par ordinary capital at P220 per share.

Based on an option pricing model used by Fire Red, the fair value of the option on January 1, 2009 was determined to be P32. The plan further
provides that the employees should be in the service of the company until at least December 31, 2011. The options are exercisable starting January
1, 2012 and expire on December 31, 2013.

At January 1, 2009, it was estimated that 15% of the employees who received the options will resign during the next three years.

Share Rights, Share Warrants and Share

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 BATCH 2019
BALIWAG POLYTECHNIC COLLEGE
2ND FLOOR STAR MALL BLDG, POBLACION, BALIWAG, BULACAN FAR 2

FINANCIAL ACCOUNTING AND REPORTING A. Almine

During 2009, 10 employees left the company. At December 31, 2009, 15 employees were expected to leave before December 31, 2011. During
2010, 12 more employees left, and at the end of the year, it was expected that 5 more would resign before December 31, 2011; although 8
employees left during 2011.

140 employees exercised their options during 2012, another 10 employees exercise their options during 2013. The rest of the options expired.

Required:

a. Compute the compensation expense resulting from share options for the years 2009, 2010 and 2011..
b. Prepare the entries for the years 2009 and 2013..

Problem 4: On January 1, 2009, Cherry Company issued 10,000 share options for the purchase of P100 par value ordinary share at a strike price
(exercise price) of P120 per share, to its key employees. The share option vest anytime once the share price reached P200, up to December 31,
2011. The options are exercisable until the end of 2012.

Based on the pricing model used by the company, the market value of the share on January 1, 2009 is P20.

Required:

a. Assume the market price of the company’s share reached P200 in December 2010 and the share options were exercised in 2011. Prepare
entries for the years 2009 through 2011.
b. Assume that the market price of the company’s share reached P200 in December 2011. 80% of the options were exercised in 2012 and
the remainder lapsed. Prepare the entries for the years 2009 through 2012.
c. How will the entries differ if the company’s share reached a market price of P200 only in June 2012, such that none of the options vested
during the prescribed period?

Problem 5: On January 1, 2010, Panda Company granted 80 share options to each of its 400 employees for the purchase of P100 par ordinary share
at P140 per share. The employees are required to be in the employ of the company at least until the option vested. The share options will vest as
follows:

End of 2010, if earnings in 2010 increased by 15%

End of 2011, if average annual earnings during 2010 and 2011 increased by 12%.

The company reported increase in 2010 earnings by 13%. At December 31, 2011 reported earnings increased by 12%.

No employees left the company during the two-year periods 2010-2011. All options were exercise during 2012. The market value of each option at
January 1, 2010 was 22.

Required:

a. All entries during 2010 through 2012

b. Assume that the reported earnings in 2010 increased by 15%. How much compensation expense would be recognized during 2010 as a
result of option plan.

Problem 6: On January 1, 2010, Joey Corporation issued 10,000 share appreciation rights (SAR) to selected employees that vest after three years,
provided the employees remain employees by the company at least until the exercise date. Each SAR entitles the employee a cash payment for an
amount the share price of the company’s ordinary share exceeds P120.

The market price of Joey’s ordinary share at the end of each investing year is as follows:

December 31, 2010 P140

December 31, 2011 150

December 31, 2012 165

Required :

a. Prepare all entries in the books of Joey Corporation for years 2010, 2011 and 2012.
b. Give the entry for the exercise of the SAR assuming that
(1) The rights were exercised on January 1, 2013, when the market price of the ordinary share is P165
(2) The rights were exercised on December 31, 2013, when the market price of the ordinary share is P172.

Share Rights, Share Warrants and Share

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 BATCH 2019
BALIWAG POLYTECHNIC COLLEGE
2ND FLOOR STAR MALL BLDG, POBLACION, BALIWAG, BULACAN FAR 2

FINANCIAL ACCOUNTING AND REPORTING A. Almine

Problem 7: On January 1, 2013, Bumble Company granted to an employee the right to choose either:

a. 12,000 shares (share or equity alternative)

b. Cash payment equal to market value of 10,000 shares (cash alternative)

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

The par value of the share is P25 and at grant date on January 1, 2013, the share price is P51. The share prices the three-year vesting period are P54
on December 31, 2013, P60 on December 31, 2014 and P65 on December 31, 2015.

After taking into account the effects of post-vesting restrictions, the entity has estimated that the fair value of the share or equity alternative is P48
per share.

Required: Determine the compensation expense from 2013 to 2015 as a result of the share alternative and cash alternative.

Problem 8: On January 1, 2013, Beauty Company purchased an equipment for the cash price of P5,000,000. The supplier can choose how the
purchase is to be settled.

The choices are 50,000 shares with par value of P50 in one year’s time, or a cash payment equal to the market value of 40,000 shares on December
31, 2013.

At grant date on January 1, 2013, the market price of each share is P110 and on the date of settlement on December 31, 2013, the market price of
each share is P130.

Required: Prepare journal entries to record the foregoing transactions.

FULL PFRS SMEs

Share-based payment transactions The share options shall be measured at fair The share options must be measured at fair
value on the date of grant. value on the date of grant.

However, if the fair value of the share options The intrinsic value is not mentioned as an
cannot be measured reliably, the intrinsic alternative
value of the share options is used. The
intrinsic value is the excess of the market
price of the shared over the option price.

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