CSTC College of Sciences Technology and Communication, Inc

CSTC COLLEGE OF SCIENCES TECHNOLOGY AND
COMMUNICATION, INC.
CSTC College Bldg. Gen. Luna St. Maharlika Hi-way, Pob. 3, Arellano Sub. Sariaya Province of Quezon R4A
Registrar’s Office: 042 3290850 / 042 7192818
CSTC IT Center: 042 7192805
Atimonan Contact Number: 042 7171420
SCHOOL OF BUSINESS AND ACCOUNTANCY
Instructional Module in
FAR 103A
Intermediate Accounting 2
STUDENT
Name:
Student Number:
Course/Year/Major:
Address:
Email Address:
Contact Number:
PROFESSOR
Name: Mark Anthony C. Delgado
Email Address: markcodel37@gmail.com
Contact Number: 09755379441
I. Module Number: 3
II. Module Title: Equity
COMMUNICATION, INC.
III. Brief Introduction of the Module:

This module covers the necessary knowledge, skills and attitudes in applying the
concepts in accounting for income taxes. Furthermore, it will give guide on accounting
for share capital transactions. Moreover, share-based compensation will be discussed
at the last part of the module.
IV. Module Outcomes:

Upon completion of this module, you must be able to:
1. Account for income taxes
2. Journalize transactions involving equity accounts
3. Apply different accounting treatment for each type of share-based compensation.
Lesson No: 1
COMMUNICATION, INC.
Lesson Title: ACCOUNTING FOR INCOME TAXES
Income taxes usually form part of the expense account of every company. In this
lesson, income taxes will form part the balance sheet of an entity. Furthermore, journal
entries concerning them will be presented.
Accounting income is the net income for the period before deducting income tax
expense. Taxable income is the income for the period determined in accordance with
the rules established by the taxation authorities.
Permanent differences are items of revenues and expense which are included in either
accounting income or taxable income but will never be included in the other. It pertains
to non-taxable revenue and non-deductible expenses. Permanent differences do not
give rise to deferred tax asset or liability because they have no future tax
consequences.
Non-taxable revenue
- Interest income
- Dividends received
Non-deductible expense
- Life insurance premium
- Tax penalties, surcharges and fines
Temporary differences are differences between the carrying amount of an asset or

liability and the tax base. It include timing differences. These are items of income and
expenses which are included in both accounting income and taxable income but at
different time periods. It will give rise to deferred tax asset and deferred tax liability.
Taxable temporary differences are the temporary difference that will result in future
taxable amount in determining the taxable income of future periods when the carrying
amount of the asset or liability is recovered and settled.
Deductible temporary differences are the temporary difference that will result in future
deductible amount in determining taxable income of future periods when the carrying
amount of the asset or liability is recovered or settled
Tax base of an asset or liability is the amount attributable to the asset or liability for tax
purposes
Deferred tax liability is the amount of income tax payable in future periods with respect
to a taxable temporary difference. It may arise when the
1. Accounting income is higher than the taxable income because of timing
differences
- Revenues are included in accounting income of the current period but are
taxable in future periods
 Instalment sale including in accounting income at the time of sale
- Expenses and losses are deductible for tax purposes in the current period but
deductible for accounting purpose in future periods.
COMMUNICATION, INC.
 Accelerated depreciation for tax purposes for tax purposes and straight line
depreciation for accounting purposes
 Development cost may be capitalized and amortized over future periods in
determining accounting income
 Prepaid expense has already been deducted on a cash basis in determining
taxable income
2. Carrying amount of an asset is higher than the tax base
3. Carrying amount of a liability is lower than the tax base
Example: Colombo Co. included in 2020 a deferred income on instalment sale of

P500,000 in accounting income. This deferred income is expected to reverse for tax
purposes in 2021.
2020 2021
Accounting income 5,500,000 7,000,000
Taxable income 5,000,000 7,500,000
Tax rate 30% 30%
To record current tax expense -2020

Income tax expense 1,500,000 (5,000,000 x 30%)
Income tax payable 1,500,000
To record deferred tax – 2020

Income tax expense 150,000 ( 5,500,000-5,000,000) x 30%
Deferred tax liability 150,000

Income tax expense 2,250,000 ( 7,500,000 x 30%)

Deferred tax liability 150,000 ( 7,000,000 – 7,500,000) x 30%
Income tax expense 150,000
Deferred tax asset is the amount of tax recoverable in future periods with respect to
deductible temporary differences and operating loss carry forward. It may arise when
the:
1. Taxable income is higher than the accounting income because of timing
differences.
- Revenues and gains are included in taxable income of current period but are
included in the accounting income of future periods.
 Rent received in advance is taxable at the time of receipt
- Expenses and losses are deducted from accounting income of current period but
are deductible for tax purposes in the future periods
 Probable and measureable litigation loss is recognized for accounting
purposes
 Estimated warranty cost is recognized for accounting purposes
COMMUNICATION, INC.
 Research cost is recognized as expense in accounting income but not for

taxable purposes
 Impairment loss is recognized for accounting purposes but ignored for tax
purposes until the asset is sold
 Doubtful accounts are recognized as expense for accounting purposes but
deductible for tax purposes only when written off as worthless.
2. Tax base of asset is higher than the carrying amount
3. Tax base of liability is lower than the carrying amount
Example: In 2020, Argentina Co. received an advance payment of P1,000,000 which

was subject to tax but not reported in accounting income until 2021. The income
statement and tax return showed the following:
2020 2021
Income before tax per income statement 6,000,000 9,000,000
Income before tax per tax return 7,000,000 8,000,000
Income tax rate 30% 30%


Deferred tax asset 300,000 ( 7,000,000-6,000,000) x 30%
Income tax benefit 300,000


Deferred tax asset 300,000
Formula:
Accounting income
Add: Nondeductible expense
Less: non-taxable revenue
Accounting income subject to tax
Add: deductible temporary differences
Less: taxable temporary differeces
Taxable income
Example: Complex Co. reported the following information relating to income before tax
for accounting purposes:
2017 2,000,000
COMMUNICATION, INC.
2018 3,000,000
2019 4,000,000
2020 5,000,000
Income tax rate 30%
In 2017, the entity recognized doubtful accounts of P100,000. Such accounts were
considered worthless or uncollectible in 2018. Analysis of the tax and books records
disclosed P120,000 in unearned rent income on December 31, 2017 that has been
recognized as taxable income in 2017 when the cash was received. Also on December
31, 2017, estimated warranty cost of P300,000 had been recognized as expense on the
books in 2017 when the product sales were made but is not deductible for tax purposes
until paid. The unearned rent income on December 31, 2017 is realized and the actual
warranty payments were made as follows:
Rent income per book Actual warranty payments

2018 40,000 20,000
2019 40,000 80,000
2020 40,000 200,000
Solution:
2017 2018 2019 2020

Accounting income 2,000,000 3,000,000 4,000,000 5,000,000
Doubtful accounts 100,000 (100,000)
Rent income 120,000 (40,000) (40,000) (40,000)
Warranty cost 300,000 (20,000) (80,000) (200,000)
Taxable income 2,520,000 2,840,000 3,880,000 4,760,000
Tax rate 30% 30% 30% 30%
Current tax expense 756,000 852,000 1,164,000 1,428,000

Income tax payable 756,000

Deferred tax asset 156,000 ( 2,520,000-2,000,000) x 30%

Income tax payable 852,000


COMMUNICATION, INC.
Income tax expense 1,164,000




Example: On December 31, 2020, the statement of financial position accounts of Simple
Co. has the same basis for accounting and tax purposes, except the following:
Carrying amount Tax base Difference

Computer software cost 4,000,000 0 4,000,000
Equipment 15,000,000 12,000,000 3,000,000
Accrued liability – health care 2,000,000 0 2,000,000
In January 2020, the entity incurred cost of P6,000,000 in relation to the development of
a computer software product. Considering the technical feasibility of the product, this
cost was capitalized and amortized over 3 years for accounting purposes using straight
line. However, the total amount was expensed in 2020 for tax purposes. The equipment
was acquired on January 1, 2020 for P20,000,000. The useful life of the equipment is 4
years with no residual value. The equipment is depreciated using the straight line for
accounting purposes and sum of year’s digits method for tax purposes. In January
2020, the entity entered into an agreement with the employees to provide health care
benefits. The cost of such plan for 2020 was P2,000,000. This amount was accrued as
expense in 2020 for accounting purposes. However, health care benefits are deductible
for tax purposes only when actually paid. The pretax accounting income for 2020 is
P13,000,000. The tax rate is 30% and there are no deferred taxes on January 1, 2020.
Pretax accounting income 13,000,000

Future taxable amount (7,000,000)
Future deductible amount 2,000,000
Taxable income 8,000,000

Deferred tax liability 2,100,000
Deferred tax asset 600,000 (2,000,000 x 30%)

COMMUNICATION, INC.

Example: On January 1, 2017, Easy Co. acquired an equipment for P8,000,000. The
equipment is depreciated using straight line method based on a useful life of 8 years
residual value. On January 1, 2020, after 3 years, the equipment was revalued at a
replacement cost of P12,000,000 with no change in the useful life. The pretax
accounting income before depreciation for 2020 is P10,000,000. The income tax rate is
30% and there are no other temporary differences at the beginning of the year.
Solution:
Cost Replacement cost Addition
Equipment 8,000,000 12,000,000 4,000,000
Accumulated depreciation
8,000,000 x 3/8 3,000,000
12,000,000 x 3/8 4,500,000 1,500,000
Carrying amount/ 5,000,000 7,500,000 2,500,000
sound value/
revaluation surplus
Equipment 4,000,000
Accumulated Depreciation 1,500,000
Revaluation Surplus 2,500,000
Revaluation Surplus 750,000 (2,500,000 x 30%)

Accounting income before depreciation 10,000,000

Depreciation ( 5,000,000 /5 years) 1,000,000
Taxable income 9,000,000

Equipment at replacement cost 12,000,000

Accumulated depreciation:
January 1, 2020 4,500,000
Depreciation on revalued amount (7,500,000/ 5 years)1,500,000 6,000,000
Carrying amount 12/31/2020 6,000,000
Equipment addition 4,000,000
Taxable temporary difference 2,000,000
Tax rate 30%
COMMUNICATION, INC.
Deferred tax liability (12/31/2020) 600,000

less: deferred tax liability (1/1/2020) 750,000
Decrease in deferred tax liability 150,000

Revaluation surplus 350,000 (2,500,000 – 750,000) / 5

Retained Earnings 350,000
Written Works:
A. ABC Co. reported pretax financial income of P2,000,000 for the year ended
December 31, 2020. The taxable income was P 1,500,000. The difference is due to
accelerated depreciation for income tax purposes. The income tax rate is 30% and ABC
Co. made estimated tax payment of P200,000 during the current year.
Prepare journal entries
Lesson No: 2
Lesson Title: SHAREHOLDER’S EQUITY
Previously, we had known the nature of deferred taxes. In this lesson, we will be
given a glimpse of the transactions involving share capital, treasury shares and share-
based compensation.
COMMUNICATION, INC.
Terms used
Share capital, portion of the paid in capital representing the total par or stated value of
the shares issued
Subscribed share capital, portion of the authorized share capital that has been
subscribed but not yet fully paid and therefore still unissued
Share premium, portion of the paid in capital representing excess over the par or stated
value
Retained earnings, cumulative balance of periodic earnings, dividend distributions, prior
period errors and other capital adjustments
Revaluation surplus, excess of revalued amount over the carrying amount of the asset
Treasury shares, corporation’s own shares that have been issued and then reacquired
but not cancelled
Legal capital, portion of the paid in capital arising from issuance of share capital which
cannot be returned to the shareholders in any form during the lifetime of the corporation.
ILLUSTRATIVE EXAMPLES
An entity was authorized to issue share capital of P4,000,000 divided into 40000
ordinary shares with par value of P100 and 1,000 preference shares at P1,000 par
value
No Entry (memorandum entry will be used)
Received subscriptions to 10000 shares at par
Subscriptions Receivable 1,000,000 (10,000 x P100)

Subscribed Share Capital 1,000,000
Collected 25% on the above subscription
Cash 250,000 (25% x 1,000,000)

Subscriptions Receivable 250,000
Received full payment for shares originally subscribed
Cash 750,000 (1,000,000 – 250,000)

Subscriptions Receivable 750,000
Subscribed Share Capital 1,000,000

Ordinary Shares 1,000,000
Declare a 2-for -1 share split
Declared a 2-for-1 share split, shares on hand is now 20,000 (memorandum entry)
Issued 500 preference shares at P1,200 each

COMMUNICATION, INC.
Cash 600,000
Preference Shares 500,000 (500 x P 1,000 par)
Share Premium 100,000 (600,000 – 500,000)
Converted 200 preference shares into ordinary shares.
Preference Shares 200,000 (200 shares x P1,000 par)

Ordinary Shares 20,000 (200 shares x P100 par –ordinary)
Share Premium 180,000
Repurchased 100 shares at P150
Treasury Shares 15,000

Cash 15,000
Sold 50 treasury shares at P250.
Cash 12,500 (50 t-shares x P 250)

Treasury Shares 7,500 (50 t-shares x P150)
Share Premium 5,000
Retired 50 treasury shares at P 7,500.
Ordinary share 5,000 (50 shares x P100)

Share premium – ordinary 2,500
Treasury shares 7,500 (50 t-shares x P150)
Shareholders donated land worth P500,000 to corporation
Land 500,000
Donated Capital 500,000
Earned P1,000,000 for the year.
Income Summary 1,000,000

Retained Earnings 1,000,000
Appropriated retained earnings related to treasury shares

Retained earnings appropriated for
treasury shares 7,500
Issued 2,000 preference shares, for P3,250,000 with 20,000 warrants to acquire 10,000
ordinary shares at P120. The market value of preference share is P1200
Cash 3,250,000
Preference share 2,000,000 (2,000 shares x P1,000 par)
COMMUNICATION, INC.
Share premium 400,000 (2,000 x P1,200 – 2,000,000)

Share warrants outstanding 850,000
Share-based Compensation – Share Options
It is a compensation arrangement established by an entity whereby an employee

receives share.
Share option – without vesting period

Ex: On January 1, 2019, a company granted 500 share option to each of its 100
employees. The fair value of share option is P20 while the fair value of the share is P60
with par value of P50. The options are exercised immediately.
Salaries –share options 1,000,000 (500 shares x P20 x 100 employees

Share options outstanding 1,000,000
To record exercise of share options

Cash 3,000,000 (500 shares x 100 employees x P60)
Ordinary share 2,500,000 (500 x 100 x P50)
Share premium 1,500,000
Share option – with vesting period

Example: On January 1, 2020, to supplement salaries of executives, Grazilda Co.
issued share options to executives to purchase 40,000 ordinary shares of P100 par
value at P125 per share. On such date, the market value of ordinary share is P150 per
share. The fair value of each share option is P30. The share options are exercisable
starting January 1, 2022 and expire one year after. Options covering 35,000 shares are
exercised on January 15, 2022. Options covering the remaining shares expired.
2020
Salaries –share options 600,000 (40,000 x P30/ 2 years))
Share options outstanding 600,000
2021
Salaries –share options 600,000 (40,000 x P30/ 2 years))
2022
Cash 5,250,000 (35,000 x 150)
Share options outstanding 1,050,000 (35,000 x 30)
Ordinary share capital 4,375,000 (35,000 x 125)
To record options expired
Share options outstanding 150,000 (5,000 x 30)
Share premium 150,000
COMMUNICATION, INC.
Share options – some employees left

Example: Rose Co. has granted 150,000 share options to the employees with a fair
value of P6,000,000. The options vest in three years. The option price is P80 and the
par value is P50. The Monte-Carlo model was used to value the options. On January 1,
2020, which is the date of grant, the estimate of employees leaving the entity during the
vesting period is 5%. On December 31, 2021, the estimate of employees leaving before
the vesting date is revised to 6%. On December 31, 2022, only 5% of the employees
actually left the entity and only 10,000 share options were exercised when the market
value is P150 per share.
2020
Salaries –share options 1,900,000 (6,000,000 x 95% / 3 years)
2021
Salaries –share options 1,860,000
(6,000,000 x 94% x 2/3) – 1,900,000
2022
Salaries –share options 1,940,000 (6,000,000 x 95% - 1,900,000 – 1,860,000)
To record exercise of options

Cash 1,500,000 (10,000 x 150)
Share options outstanding 380,000 (6,000,000 x 95% x 10,000 / 150,000)
Ordinary share capital 500,000 (10,000 x 50)
Share option – with option and exercise price varies

Example: On January 1, 2020, Hannah Co. granted share options to each of the 100
employees. The share options will vest at the end of 2022, 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 each share option is P30. No employees have left
during the three-year vesting period. The sales during the period increased 8% in 2020,
10% in 2021 and 18% in 2022.
2020
Salaries –share options 100,000 (100 x 100 x P30/3 years)
2021
Salaries –share options 300,000 (100 x 200 xP 30 x 2/3 years – 100,000)
COMMUNICATION, INC.
2022
(8% + 10% +18%) / 3 = 12%
Salaries –share options 200,000 (100 x 200 x P30 – 100,000 – 300,000)
Share options – intrinsic value method

Ex: On January 1, 2019, a company granted 10,000 share options to employees. The
par value of the share is P100 while the value of the share option is P125. It is
exercisable on December 2021.
The share market prices are P140 on December 2019; P170 on December 2020 and
P203 on December 2021.
2019
Salaries – shares options 50,000 ( 140 -125) x 10,000 share options x 1/3)
2020
Salaries – shares options 250,000

( 170 -125) x 10,000 share options x 2/3) – 50,000
2021
Salaries – shares options 480,000

( 203 -125) x 10,000 share options x 3/3) – 50,000 -250,00
To record exercise of option

Cash 1,250,000 (10,000 shares x P125
Ordinary shares 1,000,000 (10,000 shares x P100 par)
Share options – IFRIC 11

Example: On January 1, 2020, Karla Co., a parent entity, granted 200 share options to
each of 100 employees of Erika Co., a subsidiary, conditional upon the completion of
two years of service with the subsidiary. The fair value of share options on grant date is
P30 each. At grant date, the subsidiary estimated that 80% of the employees will
complete the two-year service period. On December 31, 2021, 81 employees completed
the required two years of service. The parent does not require the subsidiary to pay for
the shares needed to settle the grant of share options. The share options are exercised
on January 31, 2022. The exercise price is P60 and the par value is P50 per share.
COMMUNICATION, INC.
2020
Salaries Expense 240,000 (100 x 80% x 200 x P30 / 2years)
Equity contribution from parent 240,000
2021
Salaries Expense 246,000 (81 x 200 x P30 – 240,000)
Equity contribution from parent 246,000
2022
Cash 972,000 (81 x 200 x P60)
Share capital 810,000 (81 x 200 x P50)
Share option – IFRIC 11 (modification of condition)

Example: On January 1, 2020, Josel Co. granted 20 share options to each of the 2,000
employees. Each grant is conditional upon the employee remaining in service for three
years. The fair value of the share option on the date of grant is P60. On December 31,
2020, 80 employees left the entity and 140 employees are expected to leave by the end
of the vesting period. On January 1, 2021, the entity repriced the share options by
lowering the exercise price. As a result, the fair value of the share option increased by
P20. The modification did not change the vesting period. On December 31, 2021, 90
employees left the entity and 60 employees are expected to leave by the end of the
vesting period. On December 31, 2022, 50 employees actually left the entity.
2020
Salaries –share options 712,000 (2,000 – 80 – 140) x 20 x P60 / 3 years
2021
(2,000 – 80 – 90 – 60) x 20 x P60 x 2/3 years 1,416,000
(2,000 – 80 – 90 – 60) x 20 x P80 / 2 years 1,416,000
Total Compensation expense 2,832,000
less: Compensation expense – 2020 712,000
Compensation expense – 2021 2,120,000
2022
(2,000 – 80 – 90 – 50) x 20 x P60 2,136,000
(2,000 – 80 – 90 – 50) x 20 x P80 2,848,000
Total Compensation expense 4,984,000
less: Total Compensation expense – 2020 2,832,000
Compensation expense – 2021 2,152,000
Written Works:
A. Ocean Co. was organized at the beginning of the current year and was authorized to
COMMUNICATION, INC.
issue share capital of 100,000 shares of P50 par value. The following transactions
occurred during the current year in connection with the share capital:
 The incorporators subscribed for 25% of the authorized share capital at par value
 The incorporators paid 25% on their subscription
 Full payment was received on 15,000 shares originally subscribed
Prepare journal entries on the above transactions.
B. At the beginning of current year, Alegro Co. reported the following issues of share
capital:
200,000 shares at P20 4,000,000
250,000 shares at P25 6,250,000
During the current year, ten entity reacquired 50,000 shares at P20 and these were
reissued at year-end at P25 per share.
Prepare journal entries tor ecord the above transactions if the share has a P15 par
value.
C. On January 1, 2020, Easy Co. granted 30,000 share options to employees. The
share options will vest at the end of three years provided the employees remain in
service until then. The option price is P60 and the entity’s 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 measured reliably. The
share options have a life of 6 years. This means that the options can be exercised
within three years after vesting. All share options vested at the end of three years and
no employees left during the three-year period. The share prices for 2020 is 63, for
2021 is 66 and for 2022 is 75.
Determine the compensation expense for 2020-2022.
Lesson No: 3
Lesson Title: SHARE APPRECIATION RIGHTS
COMMUNICATION, INC.
Previously, we had known the nature of transactions involving share capital,

treasury shares and share-based compensation. In this lesson, share appreciation
rights will be elaborated as a way of share-based compensation scheme.
It entitles an employee to receive cash equal to the excess of the market value of the
entity’s share.
Example: On January 1, 2020, Generous Co. offered the top management share
appreciation rights with the following terms:
Predetermined price P 50 per share
Number of shares 20,000 shares
Service period 3 years
Expiration date December 31, 2022
The share appreciation is to be paid upon exercise. The share appreciation rights were
exercised on December 31, 2022. The share prices are as follows:
January 1, 2020 50
December 31, 2020 56
2020
Salaries 40,000 (56 – 50) x 20,000 x 1/3 year

Accrued salaries payable 40,000
2021
Salaries 200,000 (68 – 50) x 20,000 x 2/3 year – 40,000
2022
Salaries 180,000 (71-50) x 20,000 – 40,000 – 200,000
To record exercise of the share appreciation rights

Cash 420,000
Example: On January 1, 2020, Midnight Co. granted 100 appreciation rights to each of
the 600 employees on condition that the employees remain in the employ of the entity
for the next three years and the entity reaches a sales target of P15,000,000 by the end
of December 31, 2022. No employees left the entity during the three-year vesting
period. On December 31, 2020, the entity expects that the sales target will not be
achieved by December 31, 2022. However, during the year 2021, sales increased
significantly and by December 31, 2021, the entity expects that the sales target will be
achieved by December 31, 2022. On December 31, 2022, the sales target is achieved
and details on employees who exercised their rights, fair value and intrinsic value are as
COMMUNICATION, INC.
follows:
Date Employees Fair Value Intrinsic Value

December 31, 2022 100 17 15
December 31, 2023 250 21 22
December 31, 2024 250 24
The intrinsic value of the share appreciation right on the date of exercise is the amount
paid out to the employees.
2020
No entry (sales target not met)
2021
Salaries 600,000 (100 x 600 x P 15 x 2/3 year)
2022
Salaries 250,000 (100 x (600 – 100) x P 17) – 600,000

Salaries 150,000 (100 x 100 x 15)
Cash 150,000
2023
Salaries 325,000
(100 x [600 – 100 – 250] x P21 – 600,000 – 250,000

Salaries 550,000 (100 x 250 x 22)
Cash 550,000
2024
Accrued salaries payable 525,000 (250 x 100 x 21)
Salaries 75,000
Cash 600,000 (250 x 100 x 24)
Example: On January 1, 2020, Ultimate Co. granted to an employee the right to choose
either shares or cash payment. The choices are:
Share alternative – equal to 25,000 shares with par of P30
Cash alternative – cash payment equal to the market value of 20,000 phantom shares
The grant is conditional upon the completion of three years of service. On grant date, on
January 1, 2020, the share price is P51. The share prices for the three-year vesting
period are P54 on December 31, 2020, P66 on December 31, 2021 and P65 on
COMMUNICATION, INC.
December 31, 2022. After taking into account the effect of vesting restrictions, the entity
has estimated that the fair value of the share alternative is P48.
Solution:
Fair value of share alternative (25,000 shares x 48) 1,200,000
Fair value of liability on grant date, January 1, 2020 ( 20,000 x 51) 1,020,000
Equity component 180,000
2020
Salaries 60,000 (180,000 / 3 years)
Salaries 360,000 (20,000 x 54 / 3 years)

2021
Salaries 60,000 (180,000 / 3 years)
Salaries 520,000 (20,000 x 66 x 2/3 years) – 360,000

2022
Salaries 60,000 (180,000 / 3 years)
Salaries 420,000 (20,000 x 65) – 360,000 – 520,000

To record selection of cash alternative

Accrued salaries payable 1,300,000
Cash 1,300,000
To record selection of share alternative

Accrued salaries payable 1,300,000
Share capital 750,000 (25,000 x 30)
Written Works.
On January 1, 2020, Magna Co. offered the top management share appreciation rights
with the following terms:
Predetermined price P 100 per share
Number of shares 10,000 shares
Service period 3 years
COMMUNICATION, INC.
Expiration date December 31, 2022
The share appreciation is to be paid upon exercise. The share appreciation rights were
exercised on December 31, 2022. The share prices are as follows:
January 1, 2020 100
December 31, 2021 112
December 31, 2022 125
Prepare journal entries related to share appreciation rights.
Performance Task.
Choose one topic from the list below. Share your insights regarding your chosen topic.
1. Postemployment benefits
2. Defined benefit plan – accounting procedures
3. Other employee benefits
4. Retained earnings – dividends
5. Retained earnings – appropriation and quasi-reorganization
Application
A. Compute for the taxable income. Use separate sheet for your answer and
solution.
Gross income 360,000
Business expenses 280,000
Capital loss, 2 months 60,000
Capital gain, 2 years 40,000
COMMUNICATION, INC.
Lesson No: BONUS

Lesson Title: POSTEMPLOYMENT BENEFITS AND RETAINED EARNINGS
Postemployment Benefits
Employee benefits are all forms of consideration given by an entity in exchange for
services rendered by employees or for termination of employment. It can be
1. Postemployment benefits in the form of retirement benefits, life insurance and
medical care
2. Short term employee benefits
3. Other long term employee benefits
4. Termination benefits
Postemployment benefits may be contributory or non-contributory. It can be funded or

unfunded. The Philippine government had the SSS and GSIS. The entity should have a
defined contribution plan and defined benefit plan.
Actuarial assumptions are an entity’s best estimate of the variables that will determine
the ultimate cost of providing postemployment benefits.
Example: ABC Co. has a defined contribution plan that covers the existing employees.
The terms of the plan required ABC to contribute 5% of the annual employees’ salaries
to the retirement plan each year. The payroll records shows the following annual
salaries:
2019 4,000,000
2020 4,200,000
2019
Employee benefit expense 200,000 (4,000,000 x 5%)
Cash 200,000
2020
Employee benefit expense 210,000 (4,200,000 x 5%)
Cash 210,000
Example: On February 2021, Moon Co. paid P300,000 contribution in exchange for
services rendered in December 2020.
To record accrual of benefit on December 2020

Employee benefit expense 300,000
Accrued benefit payable 300,000
To record payment on February 2021

Accrued benefit payable 300,000
Cash 300,000
COMMUNICATION, INC.
Example: On December 31, 2020, Sun Co. paid P400,000 contribution to a defined
contribution plan. Of this amount, P350,000 is in part exchange for services performed
by employees for 2020 and the balance of P50,000 is in respect of services to be
performed in 2021.

Prepaid benefit expense 50,000
Cash 400,000
Projected unit credit method

A director of Easy Co. receives a retirement benefit of 10% of final salary per annum for
a contractual period of three years. the director does not contribute to the scheme. The
anticipated salary of the director over three years is P1,000,000 for 2020, P1,200,000
for 2021 and P1,440,000 for 2022. The discount rate is 5%. The present value of 1 at
5% for:
one period 0.9524
Two periods 0.9070
Three periods 0.8638
2020 2021 2022

Prior years 0 100,000 220,000
Current year 100,000 120,000 144,000
(1,000,000 x 10%) (1,200,000 x 10%) (1,440,000 x 10%)
100,000 220,000 364,000
Benefit PV factor Present value

2020 100,000 0.9524 95,240
2021 120,000 0.9070 108,840
2022 144,000 0.8638 124,387
328,467
Current Service Cost Interest Expense (5%) Present value

2020 95,240 - 95,240
2021 108,840 4,762 208,842
2022 124,387 10,442 343,671
Defined Benefit Plan – Accounting Procedures

The benefit plan shall be viewed as subentity separate and distinct from the primary
entity, which is the employer entity. The subentity maintains information that does not
appear in the financial statements of the primary entity. Such information is kept only by
means of memorandum records and therefore not reflected in the general ledger
accounts of the primary entity such as fair value of plan assets (FVPA) and projected
benefit obligation (PBO).
The fair value of plan assets is the source of fund set aside in meeting future benefit
payments. The projected benefit obligation or the defined benefit plan is the present
value of expected future payments required to settle the obligations arising from
employee service in the current and prior periods. If the FVPA is more than the PBO,
the plan is overfunded and there is a prepaid benefit cost, a noncurrent asset.
COMMUNICATION, INC.
Conversely, if the FVPA is less than the PBO, the plan is underfunded and there is an
accrued benefit cost, a noncurrent liability.
Ex: an entity had a contribution of P450,000 but with a current service cost of P500,000

Cash 450,000
Prepaid/accrued benefit cost 50,000
Ex: an entity made a contribution of P600,000 but incur P500,000 current service cost

Cash 600,000
At the beginning of the current year, Shakira Co. had the following balances in the
memorandum records with respect to a defined benefit plan:
Fair value of plan assets, P 5,000,000
Projected benefit obligation, P 6,000,000
During the year, the accountant had determined that current service cost is P1,550,000.
The discount rate is recognized at 10% and the expected return on plan assets is 12%.
The actual return on plan assets for the year is P650,000. The entity contributed
P1,200,000 to the plan at the end of the year.
Formula for Defined Benefit Plan:

Current service cost 1,550,000
Past service cost -
Interest expense on PBO (10% x 6,000,000) 600,000
Interest expense in FVPA (10% x 5,000,000) (500,000)
Employee benefit expense 1,650,000
Actual return on plan assets 650,000

Interest income in FVPA (500,000)
Remeasurement gain on plan assets 150,000
Actuarial gain -
Net remeasurement gain (loss) 150,000

Net remeasurement loss -
Net remeasurement gain (150,000)
Defined benefit cost 1,500,000
Contribution to the plan 1,200,000
Accrued benefit cost during the year 2,700,000
FVPA – beginning 5,000,000

COMMUNICATION, INC.
Interest income on FVPA 500,000

Remeasurement gain on plan assets 1,150,000
Benefits paid -
FVPA – ending 7,850,000
PBO – beginning 6,000,000

Current service cost 1,550,000
Past service cost -
Interest expense on PBO 600,000
Benefits paid -
Actuarial gain -
Actuarial loss -
PBO – ending 8,150,000

PBO – ending (8,150,000)
Prepaid/accrued benefit cost – credit (300,000)
To record the current service cost

Projected benefit obligation 1,650,000
To record past service cost

Employee benefit expense xxx
Projected benefit obligation xxx
To record the interest expense on PBO

Projected benefit obligation 600,000
To record the interest income on FVPA

Fair value of plan assets 500,000
To record contribution to the plan

Fair value of plan assets 1,200,000
Cash 1,200,000
To record benefits paid

Fair value on plan assets xxx
To record actuarial loss on PBO:

Remeasurement loss – OCI xxx
To record remeasurement gain on plan assets
Fair value of plan assets xxx
Remeasurement gain – OCI xxx
COMMUNICATION, INC.
Example: At the beginning of current year, Rachelleen Co. provided the following
information in relation to a defined benefit plan:
Prepaid/accrued benefit cost – surplus 1,000,000
Asset ceiling 700,000
Effect of asset ceiling 300,000
During the current year, the following data are gathered:
Current service cost, 700,000
Actual return on plan assets, 900,000
Contribution to the plan, 1,000,000
Past service cost, 200,000
Decrease in projected benefit obligation due to change in actuarial assumptions,
500,000
Asset ceiling at year-end, 1,200,000
Discount rate, 10%

Benefits paid -

Current service cost 700,000
Past service cost 200,000
Benefits paid -
Actuarial gain due to decrease in PBO (500,000)
Actuarial loss -

PBO – ending (5,900,000)
Prepaid/accrued benefit cost – surplus 2,000,000
Asset ceiling – December 31 1,200,000
Effect of asset ceiling 800,000

Past service cost 200,000

Actuarial gain 300,000
COMMUNICATION, INC.
Effect of asset ceiling – ending 800,000

Effect of asset ceiling – beginning 300,000
Total change in the effect of asset ceiling 500,000
Interest expense on effect of asset ceiling on January 1 (10% x 300,000) (30,000)
Remeasurement loss on asset ceiling 470,000
Example: Charlton Co. provided the following information concerning a defined benefit
plan at the beginning of current year prior to the adoption of revised PAS 19:
Debit Credit
Unamortized past service cost 1,250,000
Unrecognized actuarial gain 850,000
The transactions for the current year relating to the defined benefit plan are as follows:
Current service cost , 925,000
Discount rate, 6%
Actual return on plan assets, 485,000
Contributions to the plan, 1,350,000
Benefits paid to retirees, 995,000
Increase in projected benefit obligation due to changes in actuarial assumption, 150,000
Effective in the current year, the entity has applied the provisions of revised PAS 19 in
relation to the defined benefit plan.
To eliminate the unamortized past service cost and the unrecognized actuarial loss is:
Retained earnings 400,000 (1,250,000 – 850,000)

Past service cost -

Actuarial loss due to increase in PBO (150,000)

Net remeasurement loss -
Net remeasurement gain (50,000)
Defined benefit cost 920,000
Accrued benefit cost during the year 2,270,000

Interest income on FVPA 285,000
COMMUNICATION, INC.
Benefits paid (995,000)


Past service cost -
Interest expense on PBO 330,000
Benefits paid (995,000)
Actuarial gain -
Actuarial loss 150,000

PBO – ending (5,910,000)
Prepaid/accrued benefit cost – credit (470,000)
Other Employee Benefits
Short term employee benefits are employee benefits other than termination benefits
payable in 12 months. It includes
a. Salaries, wages and social security contributions
b. Short-term compensated or paid absences such as paid annual leave and paid
sick leave
c. Profit sharing and bonuses payable within 12 months
d. Nonmonetary benefits such as medical care, housing, car and free goods.
Short term compensated or paid absences. It may be accumulating or nonaccumulating

or vesting or nonvesting.
Example: Kamille Co. reported that employees are each entitled to two weeks of paid
vacation leave. During the current year, the employees earned 1,500 weeks of vacation
leave and used 1,000 weeks. The current salary of the employees is an average of
P3,000 per week and the salary is expected to increase by P300 per week or a future
weekly salary.
Accumulating
To record the used leaves
Vacation pay expense 3,000,000 (1,000 weeks x 3,000)
Cash 3,000,000
To accrue unused leave

Vacation pay expense 1,650,000 (500 weeks x 3,300)
Accrued vacation pay 1,650,000
Non-Accumulating
To record the used leaves
Vacation pay expense 3,000,000 (1,000 weeks x 3,000)
Cash 3,000,000
COMMUNICATION, INC.
To accrue unused leave

No entry
Example: Julia Co. has an employee benefit plan which requires that employees are
each entitled to 10 working days of paid sick leave for each year. Unused sick leave
may be carried forward for one calendar year only. Sick leave is taken out of any
balance brought forward from the previous year and then out of the current year’s
entitlement on a FIFO basis. During 2020, the sick leave records of key records of key
employees. Aye, Bee and Cee are:
Aye Bee Cee

Daily wage 1,500 2,500 4,000
Unused sick leave on January 1, 2020 10 6 4
Sick leave earned in 2020 10 10 10
Sick leave taken in 2020 7 9 6
Wage increase effective January 1, 2020 20% 25% 30%
Aye Bee Cee

Unused sick leave – January 1, 2020 10 6 4
Sick leave taken in 2020 from previous year (7) (6) (4)
Sick leave on 1/1/2020 not taken – forfeited 3 0 0
Aye Bee Cee

Sick leave earned in 2020 10 10 10
Sick leave taken in 2020 from current year (3) (2)
Unused sick leave – 12/31/2020 10 7 8
Expected daily wage

Aye: (1,500 x 120%) = 1,800
Bee: (2,500 x 125%) = 3,125
Cee: (4,000 x 130%) = 5,200
Accrued sick leave pay – December 31, 2020

Aye: 1,800 x 10 = 18,000
Bee: 3,125 x 7 = 21,875
Cee: 5,200 x 8 = 41,600
Total accrued liability – 12/31/2020 81,475
Sick leave pay expense 81,475

Accrued sick leave pay 81,475
Profit sharing
Julia Co. has a profit sharing bonus plan which requires an entity to pay employees 8%
of income for the year. The entity reported income of P5,000,000 for 2020. The bonus
payment is to be made on December 31, 2021.
To record the bonus

COMMUNICATION, INC.
Bonus expense 400,000 (5,000,000 X 8%)

Bonus payable 400,000
To record the payment

Bonus payable 400,000
Cash 400,000
Other long-term benefits

1. Sabbatical leave
2. Jubilee benefit
3. Long term disability benefit
4. Profit sharing and bonuses
5. Deferred compensation
Termination benefits
These are employee benefits provided in exchange for the termination of an employee’s
employment. It shall be measured at its actual amount if payable within 12 months;
otherwise, it will be the discounted amount.
Retained Earnings - Dividends
It represents the cumulative balance of periodic net income or loss, dividend

distributions, prior period errors, changes in accounting policy and other capital
adjustments. It can be appropriated or unappropriated. It is increase by net income and
decrease by net loss and dividends.
ILLUSTRATIVE EXAMPLES
Ex: an entity had 10,000 shares issued at P100 par.
Cash 1,000,000 (10,000 X P100 par)

Ordinary Shares 1,000,000
Declared a P0.10 cash dividend per share
Retained Earnings 1,000 (10,000 shares x P0.10)

Cash Dividends Payable 1,000
Settled the dividends
Cash Dividends Payable 1,000

Cash 1,000
Declared a property dividend of P100 worth of inventory per share
Retained Earnings 1,000,000 (10,000 shares x P100)

Property Dividends Payable 1,000,000
COMMUNICATION, INC.
Property Dividends Payable 1,000,000

Inventory 1,000,000
Declared P200,000 scrip dividends payable in six months at 12% interest

Scrip Dividends Payable 200,000
Scrip Dividends Payable 200,000

Interest Expense 12,000 (200,000 x 6/12 x 12%)
Cash 212,000
Declared P1,000,000 bonds dividends at 12%

Bonds Dividends Payable 1,000,00
Bonds Dividends Payable 1,000,000

Interest Expense 120,000 (1,000,000 x 12%)
Cash 1,120,000
Declared a 20% share dividend. Market value is P150
Retained Earnings 200,000 (10,000 shares x 20% x P 100 par)

Share Dividends Payable 200,000

Ordinary Shares 200,000
Declared a 10% share dividend when the market price is P150.
Retained Earnings 150,000 (10,000 shares x 10% x P 150 market value)


COMMUNICATION, INC.
Ordinary Shares 100,000 (10,000 shares x 10% x P100)

Share Premium 50,000
Example: On January 1, 2020, Easy Co. had ordinary and preference shares
outstanding. The incorporators or original shareholders own ten ordinary shares but no
preference shares. On December 31, 2020, the entity declared dividends on the
ordinary shares payable on March 1, 2021. The entity decided to give the ordinary
shareholders a choice between receiving a cash dividend of P500,000 per share or a
property dividend in the form of a noncash asset. The noncash asset is a standard
model from the car fleet. Each car has a fair value of P600,000 and carrying amount of
P400,000. The entity estimated that 80% of the ordinary shareholders will take the
option of the cash dividend and 20% will elect for the noncash asset.
Solution:
cash alternative (80% x 500,000) 400,000
Noncash alternative (20% x 600,000) 120,000
Dividend payable 520,000
To record dividends declared – 2020

Dividend payable 520,000
To record payment of cash dividend if it is chosen

Dividend Payable 520,000
Cash 400,000
To record payment of property dividend if it is chosen

Dividend Payable 520,000
Property, plant and equipment 400,000
Gain on distribution of property dividend 120,000
Example: Michelle Co. showed the following data:

Ordinary shares capital, par value, P10, 200,000 shares authorized, 100,000 shares
issued, P1,000,000
retained earnings, P2,000,000
Market value of share on date of declaration, 15
An ordinary share dividend is declared whereby each ordinary shareholder shall receive
one ordinary share for every five shares held. In view of the ratio of new shares to old
shares, it is necessary that fractional share warrants be issued to various shareholders
calling for 3,000 shares. Only 90% of the warrants are turned in and the remainder
lapsed.
To record share dividends declared

Retained earnings 300,000 (100,000 / 5 x P 15)
Share dividends payable 300,000
COMMUNICATION, INC.
To record issuance of dividends

Share dividends payable 300,000
Share capital 255,000 ( [20,000 – 3,000] x 15)
Fractional warrants outstanding 45,000 (3,000 x 15)
To record 90% of the warrants turned in

Fractional warrants outstanding 45,000
Share capital 40,500 ( 45,000 x 90%)
Share premium 4,500 (45,000 – 40,500)
Retained Earnings – Appropriation and Quasi-reorganization
Legal appropriation arises from the fact that legal capital cannot be returned to the
shareholders until the entity is dissolved and liquidated, such as appropriation for
retained earnings.
Contractual appropriation arises from the fact that the terms of the bond issue and
preference share issue may impose restriction on the payments of dividends
Voluntary appropriation is a matter of discretion on the part of the management.
Ex: appropriated P1,000,000 for treasury share. (depending on the purpose)

Retained earnings appropriated for treasury shares 1,000,000

Retained earnings appropriated for plant expansion fund 1,000,000
Reorganization also known as fresh start accounting.
Example: Quasi-reorganization – thru recapitalization
Current conditions warrant that the Peach Co. should undergo quasi-reorganization at
year-end. Selected items prior to the quasi-reorganization are:
1. Inventory was recorded at cost of P3,250,000. The fair value of the inventory was
P3,000,000.
Retained earnings 250,000
Inventory 250,000
2. Property, plant and equipment were recorded at P6,500,000 net of the

accumulated depreciation. The fair value of the property was P5,000,000.
Retained earnings 1,500,000
Property, plant and equipment 1,500,000
3. The par value of the share capital is to be reduced from P10 to P5 per share.
Shareholder’s equity consisted of:
COMMUNICATION, INC.
Share capital, par value P10 per share, authorized, issued and outstanding
350,000 shares 3,500,000
Retained earnings (deficit) (450,000)
3,850,000
Share capital 1,750,000
4. The resulting deficit balance is to be offset against the share premium.

Share premium 2,200,000 (-450,000 – 250,000 – 1,500,000)
Example: Quasi-reorganization – thru revaluation

Bacolod Co. has suffered substantiated operating losses for several years. The entity’s
ability to service debts and pay operating expenses has been impaired. Consequently,
the owners, and creditors have decided to execute quasi-reorganization. The statement
of financial position of Subic Co. prior to the reorganization is as follows:
ASSETS
Cash 425,000
Other current assets 1,325,000
Accumulated depreciation (2,000,000)
Goodwill 500,000
Total assets 8,250,000
LIABILITIES AND SHAREHOLDER’S EQUITY

Current liabilities 2,000,000
Preference share capital, 12% cumulative, P100 par 1,500,000
Ordinary share capital, P100 par, 50,000 shares 5,000,000
Retained earnings (1,000,000)
Total liabilities and shareholder’s equity 8,250,000
The entity provided the following information in relation to the quasi-reorganization:
1. The preference share capital is to be exchanged for P2,000,000 of 10%

debenture bonds.
Preference share capital 1,500,000
Bonds payable 2,000,000
2. Goodwill is to be written off.

COMMUNICATION, INC.

Goodwill 500,000
3. The property, plant and equipment are appraised by independent expert at a

replacement cost of P12,000,000. The SEC approved the revaluation of the
property, plant and equipment to give effect to the reorganization.
Cost Replacement cost Increase

Property, plant 8,000,000 12,000,000 4,000,000
and equipment
Accumulated 2,000,000 3,000,000 1,000,000
depreciation (25%)
6,000,000 9,000,000 3,000,000

Accumulated depreciation 1,000,000
Revaluation surplus 3,000,000
4. The resulting deficit is to be offset against the revaluation surplus.

Revaluation surplus 2,000,000 (-1,000,000 – 500,000 – 500,000)
References:
 Valix, Conrado M. (2020). Intermediate Accounting Volume 2.
Manila,Philippines Conanan Educational Supplies
 Valix, Conrado M. (2016). Practical Accounting 1. Manila,Philippines
Conanan Educational Supplies
 Valix, Conrado M. (2020). Conceptual Framework and Accounting
Standards. Manila,Philippines Conanan Educational Supplies
Prepared by:
MARK ANTHONY C. DELGADO, CPA, LPT, MBA

Academic Coordinator, SBA
Validated by: Approved by:

COMMUNICATION, INC.
NONA BHEL S. LIMBO, DBA JESS JAY M. SAJISE, DBA

Dean, SBA Vice President for Academic Affairs

CSTC College of Sciences Technology and Communication, Inc

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CSTC COLLEGE OF SCIENCES TECHNOLOGY AND

SCHOOL OF BUSINESS AND ACCOUNTANCY

III. Brief Introduction of the Module:

IV. Module Outcomes:

Lesson Title: ACCOUNTING FOR INCOME TAXES

Temporary differences are differences between the carrying amount of an asset or

Example: Colombo Co. included in 2020 a deferred income on instalment sale of

To record current tax expense -2020

To record deferred tax – 2020

To record current tax expense -2021

To record deferred tax – 2021

 Research cost is recognized as expense in accounting income but not for

Example: In 2020, Argentina Co. received an advance payment of P1,000,000 which

To record current tax expense -2020

To record deferred tax – 2020

To record current tax expense -2021

To record deferred tax – 2021

Less: taxable temporary differeces

Rent income per book Actual warranty payments

2017 2018 2019 2020

To record current tax expense -2017

To record deferred tax – 2017

To record current tax expense -2018

To record deferred tax – 2018

To record current tax expense -2019

Income tax expense 1,164,000

To record deferred tax – 2019

To record current tax expense -2020

To record deferred tax – 2020

Carrying amount Tax base Difference

Pretax accounting income 13,000,000

Income tax expense 2,100,000 (7,000,000 x 30%)

Deferred tax asset 600,000 (2,000,000 x 30%)

Income tax expense 2,400,000

Revaluation Surplus 750,000 (2,500,000 x 30%)

Accounting income before depreciation 10,000,000

Income tax expense 2,700,000 (9,000,000 x 30%)

Equipment at replacement cost 12,000,000

Deferred tax liability (12/31/2020) 600,000

Deferred tax liability 150,000

Revaluation surplus 350,000 (2,500,000 – 750,000) / 5

Prepare journal entries

No Entry (memorandum entry will be used)

Received subscriptions to 10000 shares at par

Subscriptions Receivable 1,000,000 (10,000 x P100)

Collected 25% on the above subscription

Cash 250,000 (25% x 1,000,000)

Received full payment for shares originally subscribed

Cash 750,000 (1,000,000 – 250,000)

Subscribed Share Capital 1,000,000

Declare a 2-for -1 share split

Issued 500 preference shares at P1,200 each

Converted 200 preference shares into ordinary shares.

Preference Shares 200,000 (200 shares x P1,000 par)

Repurchased 100 shares at P150

Treasury Shares 15,000

Sold 50 treasury shares at P250.

Cash 12,500 (50 t-shares x P 250)

Retired 50 treasury shares at P 7,500.

Ordinary share 5,000 (50 shares x P100)

Shareholders donated land worth P500,000 to corporation

Earned P1,000,000 for the year.