PROBLEM 1:TRUE OR FALSE

1. A share-based payment transaction is a transaction in which an entity acquires goods or services and
pays for them by issuing its own equity instruments, or by paying cash at an amount based on the
value of its own equity instruments.

2. A liability is recognized if goods or services are acquired in ácash-settled share-based payment

transaction.

3. Measurement date is the date at which the fair value of the equity instruments granted is measured for
the purposes of PFRS 2.For transactions with employees and others providing similar services, the
measurement date is the grant date.

4. Grant date is the date at which the entity and the counterparty agree to a sharebased payment
arrangement, being when the entity and the counterparty have a shared understanding of the terms and
conditions of the arrangement.

5. On the first instance, goods or services received from non-employees under share-based payment
transactions are measured at the fair value of the securities issued or granted.

6. Goods or services received from employees under a share-based payment transaction are recognized at
the 'fair value of those goods or services at the date they are received.

7. Goods and services received in share-based payment transactions with non-employees are recognized
when the shares are granted.

8. A vesting condition that requires the employee to remain in the entity's employ during the vesting
period is called a service condition.

9. The effects of share-based payment transactions are recognized in profit or loss and, whenever
applicable, in financial position.

10. For accounting purposes, a modification to a share option grant that is not beneficial to the employee
is ignored.

PROBLEM 2:MULTIPLE CHOICE-THEORY

1. Which of the following is within the scope of PFRS 2?

a. Issuance of stock dividends to shareholders.

b. Issuance of shares as consideration for a business combination.

c. Issuance of shares as compensation for employee services.

d. Issuance of stock rights to shareholders.

2. According to PFRS 2, a shàre-based payment transaction is

a. equity-settled.

b. cash-settled.

c. a choice of settlement between (a) and (b) above.

d. any of these

3. An agreement to issue ordinary shares to employees which allows them to become part-owners of the
company is known as a

a. share appreciation right.

 b. company sharing plan.

c. employee share option plan.

d.company subscription plan

4. On May 23, 20x1, Quit, Inc. offered its employees share options, subject to approval by the shareholders.
The shareholders approved the share options in their general assembly held on June 18, 20x1. The
employees received the share options on June 30, 20x1. What is themeasurement date of the share options?

a. May 23 b.June 18 c.June 30 d.all of these

5. For employee share option plans, which of the following cannot be used as the first instance
measurement of the services received?

a. Fair value determined using the Binomial model.

b. Fair value determined using the Black-Scholes model.

c. Fair value determined using the Monte-Carlo model.

d. Intrinsic value.

6. Intrinsic value is

a. subscription price minus fair value of share.

b. fair value of share minus subscription price.

c. subscription price minus fair value of share option.

d. fair value of share option minus subscription price.

7. When a share-based payment transaction is with a non employee, the goods or services received are
measured at the

a. fair value of the goods or services received.

b. fair value of the equity instrument granted.

c. choice(a), however, if this is not available then choice (b)

d. choice (b), however, if this is not available then choice (a)

8. Equity-settled share-based payments are recognized as

a.increase in equity c.expense

b.liability d. a and b

9. If there are no vesting conditions, the fair value of the share options is recognized

a. immediately as expense and as a liability at grant date.

b. immediately as expense and as an increase in equity at grant date.

c. recognized as expense and liability over the vesting period.

d. recognized as expense and increase in equity over the vesting period.

10.Which of the following statements is incorrect?

a. Vesting conditions, other than market conditions, are taken into account when estimating the
number of equity.instruments expected to vest. The estimate is subsequently revised in
light of new information.

b. Market conditions are taken into account when estimating the fair value of the equity
instruments granted. The estimate is not subsequently revised irrespective of the outcome.

c. After vesting, the entity makes no subsequent adjustment to total equity or to previously
recognized salaries expenses in relation to the employee share options granted.

d. When the share'options are subsequently exercised or forfeited, the entity transfers to profit or
loss any balance of share premium arising from the share options granted.

11. When share options issued to employees are exercised, an entity will most likely

a. recognize loss for the unamortized balance of the share options.

b. recognize gain for the unamortized balance of the share options.
c. make a transfer from one component of equity to another.
d. a or b.

12.When share options issued to employees are forfeited,an entity will most likely

a. recognize loss for the unamortized balance of the share options.

b. recognize gain for the unamortized balance of the share options.
c. make a transfer from one component of equity to another.
d. do nothing.

13. Modifications of terms or conditions on which the equity instruments were granted are accounted for

a. retrospectively.
b. only in the period of modification.
c. only if they are beneficial to the employee.
d. only if they are beneficial to the entity.

14. The incremental fair value resulting from a modification of terms or conditions is recognized

a. as loss in the period of modification.

b. as additional expense over the remainder of the vesting period.
c. directly in equity as a transfer from one equity component to another.
d. not recognized

15. On January 1, 20x1, Fogs Co. granted 1,000 share options to each of its 20 key employees conditional
upon the employee completing a 3-year service period. The fair value per share option on Jan. 1,
20x1 was P12. In 20x2, Fogs added a subscription price of P10 to the share options. How should
Fogs.Co.account for the repricing?

a. Fogs Co. should recognize the differential fair value retrospectively.

b. Fogs Co. should recognize the differential fair value prospectively.
c. Fogs Co.should ignore the repricing.
 d. Fogs Co.should recognize the repricing directly in equity.

PROBLEM 3: EXERCISE

1. On May 22, 20x1, Sloppy Co. agreed to issue 10,000 shares (P200 par) to Careless, Inc. in exchange
for 1,000 units of Raw material X. The price of Raw material X is volatile. Careless delivered the
inventories on June 21, 20x1. Sloppy iissued the shares on July 5,20x1.Information on fair values
is as follows:

Sloppy shares Raw material A

May 22,20x1 P218 per share P2,180 per unit

June 21,20x1 P220 per share P3,000 per unit

July 5,20x1 P225 per share P3,650 per unit

Requirement: Provide the journal entries.

1. On January 1, 20x1, Goat Co. granted 1,000 share options to each of its 100 key employees
conditional upon each employee remaining in Goat's employ over the next 3 years. The fair
value per share option on Jan. 1, 20x1 was P30. Goat Co. estimatedd on Jan. 1, 20x1 that 16%
of the share options will vest.
In 20x1, 15 employees left and Goat Co. revised its estimate of employee departures to a total
of 20%.
In 20x2, 3 employees left. Goat Co. estimated that additional 5employees will leave before the
end of 20x3.
In 20x3, no employees left.

Requirement: Provide the journal entries.

2. Fretless Co. granted 1,000 share options to each of its 200employees on January 1, 20x1. The
fair values on January 1,20x1 were P100 per share and P25 per share option. The share options
vest in three years' time and are exercisable four years after the vesting date. The exercise price
is P80 per share.
On January 1, 20x1, Fretless Co. expected 5 employees to leave before the vesting date. Six
employees left during 20x1. On December 31, 20x1, Fretless Co. revised its estimate of
employee departures to a total of 8 before the vesting date.
During 20x2, 1 employee left. Fretless Co. did not revise its estimate of employee departure.
During 20x3,3 employees resigned.
 Requirements: Provide all the entries in 20x1,20x2 and 20x3.

PROBLEM 4: MULTIPLE CHOICE-COMPUTATIONAL

1. On January 1, 20x1, an entity grants 1,000 share options to each of its five employees as compensation
for their commendable past performance. The share options are exercisable immediately at an exercise
price of P70, and expire after 3 years. The fair value per option on grant date is P60.What amount of
salaries expense is recognized in 20x1 and on what date is the salaries expense recognized?

a. 100,000,Jan.1,20x1 c.300,000,Jan.1,20x1

b. 100,000,Dec.31,20x1 d.20,000,Dec.31,20x1

2. On January 1, 20x1, an entity grants each of its ten employees 500 share options on condition that the
employee remains in the entity's employ until December 31, 20x2. The share options are exercisable

20x1, 1 employee resigned. The entity expects thatan additional1employee will resign in 20x2. No
within three years after December 31,20x2. The fair value per share option on grant date is P60. In

employees resigned in 20x2.What amount of salaries expense is recognized in 20x2?

a.80,000 b.120,000 c.150,000 d.0

3. January 1, 20x1, an entity grants its employees share options with a total fair value of P3,200,000. The
options vest in three years' time. On December 31, 20x1, the entity expects that only 90% of the share
options will vest. On December 31,20x2, the entity revises its estimate of the number of share options that
will vest to 96%. On December 31, 20x3, 100% of the share options vest. What cumulative amount of share
premium is recognized as of Dec. 31, 20x2 and how much is the salaries expense for 20x3,respectively?

a. 2,048,000;1,152,000 c.1,088,000;960,000

b. 2,048,000;1,088,000 d.960,000;1,088,000

4. On January 1, 20x1, an entity granted 1,000 share options to each of its 100 employees. On January 1,
20x1, the fair value were P80 per share and P12 per share option. The shar options will vest after three
years. On January 1, 20x1, the entity expected that 7 employees will resign before the vestin date.

 In 20x1, 6 employees resigned. Three more employees'ar expected to leave before the vesting
date.
 In 20x2, 1 employee resigned. The entity revised its estimate o employee departures to a total
of eight.
 In 20x3, 2 employees resigned

How much is the salaries expense in 20x3?

a. 348,000 b.356,000 c.364,000 d.372,000
2. On January 1, 20x1, Water Co. granted 1,000 share options to each of its 100 key employees
conditional upon each employee completing a three-year service period. Under the terms of the
grant, the shares will vest:
d. at the end of 20x1 if the profit increases by more than 20%;
e. at the end of 20x2 if the profit increases by more than an average of 15% per year over the
two-year period;or
 f. at the end of 20x3 if the profit increases by more than an average of 10% per year over the
three-year period.

The fair value per share option on Jan.1,20x1 was P45.

 In 20x1, Water's profit increased by 18% and 5 employees left.Water expects that profit
will continue to increase at a similar rate and 6 more employees will leave in 20x2.
 In 20x2, Water's profit increased by 14% and 3 employees left.
 In 20x3, Water's profit increased by 8% and 3 employees left.

How much is the salaries expense in 20x3?

a. 348,000 b.356,000 c.364,000 d.0

3. On January 1, 20x1, Headache Co. granted share options to each of its 100 key employees
conditional upon each employee remaining in Headache's employ over the next 3 years and the
volume of sales increasing by at least an average of 10% per year.Under the terms of the grant, each
employee will receive:

i. 1,000 shares if the volume of sales increases by an average of 10% to 15% during the 3-year
vesting period;
ii. 1,200 shares if the volume of sales increases by an average of more than 15% to 20% during
the 3-year vesting period; and
iii. 1,400 shares if the volume of sales increases by an average of more than 20% during the 3-
year vesting period.

The fair value per share option on January 1,20x1 was P45.

 In 20x1, sales increased by 21% and 8 employees left. Sales are expected to
continue to increase at a similar rate in the next 2years. Ten more employees
are expected to leave before the end of 20x3.
 In 20x2, sales increased by 18% and 5 employees left Headache Co. expects
that sales will continue to increase at a similar rate and that the total employee
departures by the end of 20x3 will be 15.
 In 20x3, sales increased by 6% and 2 employees left.

How much is the salaries expense in 20x3?

a. 765,000 b.846,000 c.964,000 d.0

7. On January 1, 20x1, Driver Co. granfed 1,000 share options to each of its 100 key employees conditional
upon each employee remaining in Driver's employ until the end of 20x3 and Driver's share price increasing
to at least P80 at the end of 20x3. The fair value per option on January 1,20x1, adjusted for the possibilities
that the share price will and will not be achieved, was P45. In 20x1 and 20x2,Driver Co.expected that 20
employees will leave by the end of 20x3. However, by December 31, 20x3, 82 employees remained. The
share price fell short of the target and Driver Co. forfeited the grant on Dec. 31,20x3. How much total share
premium will have been recognized from the grant as of January 1,20x4?

a. 0 b.560,000 c.3,600,000 d.3,690,000

8. On January 1,20x1,Mangoes Co.granted 1,000 share options to each of its 100 employees. The share
options have a five-year life but will vest and become exercisable immediately if and when Mangoes' share
price increases to at least P80,provided that the employee remains in service until the share price target is
achieved. The fair value per share option on Jan,1, 20x1, adjusted for the market condition, was P24. In
estimating the fair value, Mangoes determined that it is most likely that the share price target will be
achieved by the end of 20x3.

 In 20x1, 5 employees left and the year-end share price increased to P75. Mangoes estimated that
92% of the share options will vest by the end of 20x3.
 In 20x2, 3 employees left and the year-end share price decreased to P72. Mangoes expected
that, in total, 10 employees will have left by the end of 20x3.
 In 20x3, 1 employee left and the year-end share price further decreased to P70.
 In 20x4, 1 employee left and the year-end share price increased to P81.

How much salaries expense is recognized in 20x3?

a. 744,000 b.736,000 c.(1,440,000) d.0

9. On January 1, 20x1, an entity granted 1,000 share options to each of its 100 employees. On January 1,
20x1, the fair values were P80 per share and P12 per share option. The share options will vest after three
years.

 In 20x1, 6 employees resigned. Three more employees are expected to leave before the vesting date.
 In 20x2, 1 employee resigned. The entity decided to issue the share options to the remaining
employees without any further condition.

How much is the salaries expense in 20x2?

a. 740,000 b.752,000 c.764,000 d.0

10. On January 1, 20x1, Rainy Co. granted 1,000 share options to each of its 100 employees. Each grant is
conditional upon the employee remaining in service over the next 3 years. The fair value per share
option on January 1,20x1 was P24.

 In 20x1, 17 employees left, way beyond what Rainy originally expected. Thus, on Dec. 31, 20x1,
Rainy decreased the exercise price of the share option hoping this would encourage the remaining
employees to stay until theend of 20x3. The repricing resulted to an increase in the fair value of the
share options on Dec. 31, 20x1 from P22 to P36. Rainy estimated that only three more employees
will leave before the end of 20x3.
 In 20x2, 1 employee left. Rainy Co. did not revise its previous estimate of employee departure.
 In 20x3,1 employee left.

How much is the salaries expense in 20x2 and the 'cumulative balance of share premium from
the grant as of Dec. 31, 20x3, respectively?
a. 980,000;1,280,000 c.1,200,000;3,054,000
b. 980,000;2,180,000 d.1,200,000;3,078,000

Fact pattern for the next three independent cases:

On January 1,20x1,Jeep Co. granted 1,000 share options to each of its 100 rank-and-file
employees conditional upon the employee completing a 5-year service period. The fair value
per share option on Jan. 1,20x1 was P9.
 11. Case A: In 20x1, 30 employees resigned. This shocked the management as they did not expect so
many will resign.Thus,on Dec. 31, 20x1, in its attempt to persuade the remaining employees to
stay, the management changed the vesting date from Dec.31,20x5 to Dec. 31, 20x3. After the
modification, the management expected that there will be no more resignations.In 20x2,40
employees resigned. The ultimate bosses got mad and fired the management, who were left in tears.
No employees resigned thereafter. The share options were issued to the remaining employees on
Dec. 31, 20x3, and they lived happily ever after for one year. How much is the salaries expense in
20x3?
a. 49,000 b.54,000 c.90,000 d.0

Hint: The effect of a beneficial modification is recognized over the period from the modification date until
vesting date. (PFRS 2.B43)

12. Case B: In addition to the service condition, the grant also requires that the total production of
the employees exceed 1,000,000 units of a particular product over the 5-year period.

 In 20x1, the employees produced 500,000 units. No employee resigned.

 In 20x2, the employees produced 450,000 units. Seeing this as an opportunity, the evil
management increased the production target from 1M to 2.5M units. Forty employees resigned
right after the modification. Jeep Co. expects the remaining sixty employees to be loyal until the
end of 20x5.
 In 20x3, only 100 units were produced because all the employees resigned.

How much are the salaries expenses in 20x2 and 20x3, respectively?

a. 60,000;0 c.0;(300,000)
b. 36,000;(216,000) d.0;0

13. Case C: In 20x1, the employees rallied and demanded'a triple increase in salary or else they will resign.
Jeep Co. founad the demand to be ridiculous and impossible to meet. To appease the employees, and
hopefully to discourage them from mindlessly following their finicky leader who enjoys creating chaos,Jeep
Co. doubled the share options from 1,000 to 2,000per employee on Dec. 31, 20x1. The fair value per share
option on Dec. 31, 20x1 was P10. No employee left in 20x1. On Dec.31;20x1,Jeep Co.estimated that 5
employees will leave before the end of 20x5. In 20x2, 1 employee (the 'leader') left.On Dec.31, 20x2, Jeep
Co. estimated that there will be no further employee resignations. How much is the salaries expense in
20x2?

a. 362,700 b.402,400 c.432,900 d.504,600

Hint: See hint in Case A.

14. On January 1, 20x1, November Rain Co. granted 1,000 share options to each of
its 20 key employees conditional upon the employee completing a 3-year service
period. The fair value per share option on Jan. 1, 20x1 was P12. In 20x2,
November extended the vesting period from 3 years tó 10 years. Two executives
left right after the modification. There were no employee departures in 20x1. As at
December 31, 20x2,November expects 8 more employees wilI leave before the
vesting date. How much is the cumulative amount of equity recognized from the
grant as at December 31,20x2?
a. 24,000 b.36,000 c.54,000 d.80,000

15. On January 1, 20x1, Peace Co. granted 1,000 share options to each of its 10
executives conditional upon the completion of a 3-year service period. The fair value
per share option was P30.No employees left in 20x1. Two executives left in 20x2.
On Dec. 31, 20x2, Peace Co. decided to issue the shares to the 8executives with no
further condition. How much is the salaries expense in 20x2?

a. 60,000 b.100,000 c.140,000 d.240,000

PROBLEM 5: FOR CLASSROOM DISCUSSION

Share-based transaction with a non-employee

1. On May 21, 20x1, Athena Co. contracted a supplier, an unrelated party, for the
acquisition of brand new equipment with cash selling price of P2,000,000 in
exchange for Athena's 10,000 (P100 par) shares. The supplier delivered the
equipment on July 5, 20x1 and Athena Co. issued the shares on July 20, 20x1.
Athena's shares have fair values per share of P199 on May 21, 20x1, P192 on
July 5, 20x1 and P197 on July 20,20x1.

Requirement: Provide the journal entries.

2. Use the information in the preceding problem but assume the equipment is specialized in
nature, such that its fair value cannot be determined reliably.

Requirement: Provide the journal entries.

Share-based compensation plan - without vesting condition

3. On January 1,20x1, Devin Co. awarded 1,000 share options to each of its 10 key
employees for their exemplary services in the past. The fair value per share option on
January 1, 20x1was P50. The options are exercisable immediately and will expire after
two years.
Requirement: Provide the journal entries.

Share-based compensation plan-with service condition

3. On January 1, 20x1, Zevrek Co. granted 1,000 share options to each of its 10 key
employees conditional upon each employee remaining in Zevrek's employ until the end
of 20x3. The fair value of each share option on January 1, 20x1 was P21.On January 1,
20x1, Zevrek estimated that a total of 2 employees will leave during the vesting period.
 In 20x1, 2 employees left. Zevrek estimated that a total of 3 employees will have
left before the end of 20x3.
 In 20x2, 1 employee left. Zevrek estimated that 1 more employee will leave in
20x3.
 In 20x3, no employees left.

Requirement: Provide the journal entries.

Grant with Non-market performance condition

4. On January 1, 20x1, Birthday Co. granted 1,000 share options to each of its 10 key
employees conditional upon each employee completing a 3-year service. The exercise
price is P100; however, this amount decreases to P50 if the company’s