664 CPA EXAMINATION REVIEWER: AUDITING PROBLEMS

On grant date, the entity estimates that the fair value Of the share
options, with an exercise price of P20, is PIO per option. If the
exercise price is P30, the entity estimates that the share
options have a fair value of P9 per option.

The following actual events occurred:

2018
60 employees have left. The entity expects, on the basis of a
weighted average probability, that a further 60
employees will leave during 2019 and 2020, respectively.

The entity's earnings increased by 12%, and the entity

expects that earnings will continue to increase at this rate over
the next two years. The entity therefore expects that the
earnings target will be achieved, and hence, the share
options will have an exercise price of P20.

2019
At year end, a further 70 employees have resigned. The
entity expects that a further 60 employees will leave
during 2020.
The entitys earnings increased by 13%, and it continues to
expect that the earnings target will be achieved.

2020
A further 56 employees have left by the end the year.
Due to a general decrease in market demand, the entitys
earnings increased by only 3%. Because the earnings
target was not achieved, the 100 vested share
options for each employee have exercise price of P30.
 Based on the preceding information, determine
thefollowing:

1. Compensation expense for 2020

A. P270,OOO C. P273,333
B. P192,600 D. P244,200
2, Compensation expense for 2021
A. P192,600 c. P273,333

B. P266,667 D. P270,OOO

3. Compensation expense for 2022

A. P273,333 c. P266,667

B. P270,OOO D. P192,600

4. Share options outstanding at the end of 2021

A. P540,OOO C. P266,667 B. P810,OOO D. P459,267

5. Share options outstanding at the end of 2022

A. P810,OOO C. P820,OOO B. PO D. P732,600

SOLUTION 8-16

Compensation Cumulative
Expense Compensation

Year Caiquia€on for PeriQd Expens

e
1 PIO x 820 x 100 x 1/3 273,333 273,33
 3
2
2 x 810 x 100 x /3 266,667 540,000
3 P9 x 814 x 100 192,600 732,600
2020
2018 2019
Number of employees at grant date 1,000 1,000 1,000
number of resignations:
2016 (60) (60) (60)
2017 (70) (70)
2018 (56)
Expected number of resignations:
2017 (60)
2018
Expected to vest
666 CPA!UMINATIONREVIEWER: AUDITING PROBLEMS

1, Compensation expense for 2018

Answer: C
2. Compensation expense for 2019
AnsweR: B
3. Compensation expense for 2020 pt92.600
Answer: D
4. Share options outstanding at the end of 2019 P540,ooo
Answer: A
5. Share options outstanding at the end of 2020 P732.600
Answer: D

PROBLEM 8-16

Share-Based Compensation: Length of the Vesting

Period Varies (PFRS 2, implementation Guidance)
At the beginning of year 1, the entity grants 100 shares each to
500 employees, conditional upon the employees remaining in
the entitys employ during the vesting period.

The shares will vest at the end of year 1 if the entity's earnings
increase by more than 18 percent; at the end of year 2 if the entitys
earnings increase by more than an average of 13 percent per year
over the two-year period; and at the end of year 3 if the entitys
earnings increase by more than an average of 10 percent per year
over the three-year period.

The shares have a fair value of P20 per share at the start of year

l' which equals the share price at grant date.

By the end of year 1, the entitys earnings have increased by M
percent, and 20 employees have left. The entity expects that
earnings will' continue to increase at a similar rate in year 2, and
therefore