Quiz No. 2 Accounting and Tax Quiz

On January 1, 2005, Happy Corporation's ordinary share is selling for P55 per share.  On this date, Happy creates a compensatory share option plan for its 70 key employees.  The plan document states that each employee may purchase 500 shares of its P10 par ordinary shares for P55 per share after working for the company for three years.  On this date, Happy estimated that each option has a value of P18.  Historically, Happy has experienced an average employee turnover rate of 5% per year and, on the grant date, it expects this rate to continue over the next three years.  Because of lower turnover, at the end of 2006, Happy changes its estimated average turnover rate to 4% for the entire service period.  At the end of 2007, the share options vest for 62 employees.  On January 13, 2008, ten executives exercise their options when the share is selling at P75 per share.  Happy uses the fair value method to account for this plan.

Question: How much is the compensation expense to be reported in relation to the plan for the year 2007?


The correct answer is: P186,411
For this quiz, nobody got the correct answer.  Anyway, this is the solution to the quiz:

                                                                                         2005                            2006                      2007

Estimated (actual compensation)                          P540,146                   P557,384              P558,000

Fraction of service period expired                                   1/3                              2/3                        3/3

Estimated compensation expense to date             180,049                       371,589                 558,000

Accumulated compensation expense recog        _            0                    180,049                  371,589

Current compensation expense                             P180,049                    191,540               P186,411

2005: P18*500sh op*70 employees*95%*95%*95% = P540,146

2006: P18*500sh op*70 employees*96%*96%*96%= P557,384

2007: P18*500sh op*62 employees = P558,000