APPROPRIATION AND QUASI-REORGANIZATION

1. On January 1, 2022, an entity reported P1,750,000 of appropriated retained earnings for the construction
of a new office building which was completed on December 31, 2022 at a total cost of P1,500,000. On
December 31, 2022, the entity appropriated P1,200,000 of retained earnings for the construction of a
new plant. Also, P2,000,000 of cash was restricted for the retirement of bonds due in 2023. On December
31, 2022, dividends on 50,000 cumulative preference shares 10% P100 par value have not been declared
for 3 years.

On December 31,2022, what amount should be reported as appropriated retained earnings?

a. 1,200,000
b. 2,700,000
c. 4,700,000
d. 3,200,000

2. An entity provided the following data for the current year:

Retained earnings unappropriated, January 1 2,000,000

Overdepreciation due to prior period error, net of tax 400,000
Net income 3,000,000
Retained earnings appropriated for treasury shares (original balance is P500,000
but reduced by P200,000 by reason of reissuance of the treasury shares) 300,000
Retained earnings appropriated for contingencies (beginning balance P700,000,
but increased by current appropriation of P100,000) 800,000
Cash dividends paid to shareholders 1,000,000
Change in accounting policy from FIFO to an average – credit, net of tax 300,000

What amount should be reported as unappropriated retained earnings at year end?

a. 4,500,000
b. 4,800,000
c. 4,700,000
d. 4,200,000

3. An entity issued 200,000 shares of P5 par value at P10 per share. At the beginning of current year, the
retained earnings amounted to P3,000,000. In March, the entity reacquired 50,000 treasury shares at P20
per share. In June, the entity sold 10,000 of these shares to corporate officers for P25 per share. The entity
used the cost method to record treasury shares. Net income for the current year was P600,000.

What amount should be reported as unappropriated retained earnings at year-end?

a. 3,600,000
b. 3,650,000
c. 3,750,000
d. 2,800,000

4. At the beginning of current year, an entity reported the following shareholders’ equity:

Share capital, P5 par, 600,000 shares authorized, 200,000 shares issued and outstanding 1,000,000
Share premium 6,000,000
Retained earnings 2,800,000
 During the current year, the following chronological transactions affected shareholders’ equity:

* Reacquired 10,000 shares at P30 per share to be held as treasury

* Declared and issued a 30% share dividend
* Declared and paid cash dividend of P10 per share
* Net income for the current year amounted to P3,000,000

What amount should be reported as unappropriated retained earnings at year-end?

a. 2,745,000
b. 3,045,000
c. 2,700,000
d. 2,600,000

5. Adverse circumstances warrant that an entity should undergo a quasi-reorganization.

* Inventory with a fair value of P2,000,000 is currently recorded at cost of P2,500,000

* Plant assets with a fair value of P7,000,000 are currently recorded at P8,500,000, net of accumulated depreciation
* Individual shareholders contribute P4,000,000 to create additional capital to facilitate the quasi-reorganization.
No new shares are issued.
* The par value of the share is reduced from P25 to P5.

The entity reported the following shareholders’ equity prior to the quasi-organization:

Share capital, P25 par, 100,000 shares outstanding 2,500,000

Share premium 1,750,000
Retained earnings (deficit) (3,000,000)

After the quasi-reorganization, what amount should be reported as share premium?

a. 2,750,000
b. 3,250,000
c. 3,750,000
d. 1,750,000

6. An entity had sustained heavy losses over a period of time and conditions warrant that the entity should
undergo a quasi-reorganization.

• Inventory with cost of P6,500,000 was recorded at the fair value of P6,000,000.
• Property, plant and equipment were recorded at P12,000,000, net of accumulated depreciation. The sound value was
P8,000,000.
• The share capital is P7,000,000 consisting of 700,000 shares with par value of P10, the share premium is P1,600,000 and
the deficit in retained earnings is P900,000.
• The par value of the share is reduced from P10 to P5.

After the quasi-reorganization, what amount should be reported as total shareholders’ equity?

a. 3,300,000
b. 3,500,000
c. 3,700,000
d. 4,200,000

7. An entity provided the following shareholders’ equity at year-end:

Share capital, P30 par, 100,000 shares 3,000,000
Share premium 1,500,000
Retained earnings (deficit) (2,100,000)

The entity put into effect a quasi-reorganization by reducing the par value of the share to P5 and
eliminating the deficit against share premium.

After the quasi-reorganization, what amount should be reported as share premium?

a. 1,500,000
b 1,900,000
c. 4,000,000
d. 600,000

8. Immediately prior to the quasi-reorganization, an entity reported the following shareholders’ equity:

Share capital, P100 par, 500,000 shares 50,000,000

Share premium 5,000,000
Retained earnings (deficit) (8,000,000)

The shareholders approved the quasi-reorganization to be accomplished by reduction in inventory

P2,000,000, reduction in property, plant and equipment P4,000,000, writeoff of goodwill P1,000,000 and
appropriate adjustment to the capital structure against share premium first and any remaining deficit
against the share capital account.

What amount should be reported as reduction in the share capital account to implement the quasi
reorganization?

a. 10,000,000
b. 15,000,000
c. 20,000,000
d. 25,000,000

SHARE OPTIONS
1. On January 1, 2022, an entity granted 200 share options each to 300 employees, conditional upon the
employee’s remaining in the entity’s employ during the vesting period. The share options vest at the end
of a three-year period. On grant date, each share option has a fair value of P50. The par value per share
is P100 and the option price is P120. On December 31, 2022, 20 employees have left and it is expected
that on the basis of a weighted average probability, a further 10 employees will leave before the end of
the three-year period. On December 31, 2023, 10 employees actually left and a further 15 employees will
leave during 2024. On December 31, 2024, 15 employees actually left and all of the share options are
exercised on such date.

1. What amount should be reported as compensation expense for 2024?

a. 900,000
b. 800,000
c. 700,000
d. 850,000
2. What amount should be reported as share premium when the options were exercised on December
31, 2024?
a. 3,570,000
b. 1,020,000
c. 1,080,000
d. 3,780,000

2. An entity granted share options to employees. The total compensation expense to the vesting date on
December 31, 2025 was calculated at P6,000,000. The entity decided to settle the award early on
December 31, 2024. The compensation expense charged since the date of grant on January 1, 2022 was
P1,500,000 for 2022 and P1,300,000 for 2023. The compensation expense that would have been charged
for 2024 is P1,200,000.

1. What amount should be reported as compensation expense for 2024?

a. 3,200,000
b. 2,000,000
c. 1,200,000
d. 0
2. What amount should be reported as compensation expense for 2024, if the share options are not
exercised but instead, the entity paid the employees P5,000,000 on December 31, 2024?
a. 5,000,000
b. 2,200,000
c. 3,200,000
d. 0

3. An entity 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 share options. On January 1, 2022, which is the date of grant, the estimate of employees
leaving the entity during the vesting period is 5%. On December 31, 2023, the estimate of employees
leaving before vesting date is revised to 6%. On December 31, 2024, only 5% of the employees actually
left and only 100,000 share options were exercised when the market value is P150 per share and the
remaining share options lapsed.
1. What amount should be reported as compensation expense for 2024?
a. 2,000,000
b. 1,900,000
c. 1,860,000
d. 1,940,000

2. What amount should be reported as share premium from the exercise of the share options on
December 31, 2024?
a. 7,000,000
b. 8,700,000
c. 1,700,000
d. 4,000,000

4. On January 1, 2022, an entity granted to a senior executive 30,000 share options, conditional upon the
executive’s remaining in the entity employ until December 31, 2024. The par value per share is P50. The
exercise price is P100. However, the exercise price drops to P80 if the entity’s earnings increase by at
least an average of 10% per year over the three-year period. On grant date, the entity estimated that the
fair value of the share option is P30 if the exercise price is P80 and P25 if the exercise price is P100.
During 2022 and 2023, the earnings increased by 11% and 12% respectively. However, during 2024, the
earnings increased only by 4%. All share options were exercised on December 31, 2024.
1. What amount should be reported as compensation expense for 2022?
a. 900,000
b. 300,000
c. 450,000
d. 400,000
2. What amount should be reported as compensation expense for 2023?
a. 600,000
b. 300,000
c. 150,000
d. 250,000
3. What amount should be reported as compensation expense in 2024?
a. 300,000
b. 600,000
c. 150,000
d. 750,000
4. What is the share premium upon exercise of the share options on December 31, 2024?
a. 1,500,000
b. 2,400,000
c. 2,250,000
d. 1,650,000

5. On January 1, 2022, an entity granted 60,000 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
par value is P50. At the date of grant, the fair value of the share options cannot be measured reliably.
The share options have a life of 4 years. The share prices are P62 on December 31, 2022, P66 on
December 31, 2023, P75 on December 31, 2024 and P85 on December 31, 2025. All share options were
exercised on December 31, 2025.
1. What amount should be reported as compensation expense for 2022?
a. 75,000
b. 60,000
c. 40,000
d. 30,000
2. What amount should be reported as compensation expense for 2023?
a. 360,000
b. 240,000
c. 200,000
d. 180,000
3. What amount should be reported as compensation for 2024?
a. 900,000
b. 300,000
c. 450,000
d. 660,000
4. What amount should be reported as compensation expense for 2025?
a. 200,000
b. 660,000
c. 600,000
d. 0
5. What is the share premium from the exercise of the share options on December 31, 2025?
a. 2,100,000
b. 1,500,000
c. 900,000
d. 450,000