On October 1, 2018, Farmer Fabrication issued stock options for 200,000 shares to a division manager. The options have an estimated fair value of $6 each. To provide additional incentive for managerial achievement, the options are not exercisable unless divisional revenue increases by 2% in four years. Suppose that Farmer initially estimates that it is not probable the goal will be achieved, but then after one year, Farmer estimates that it is probable that divisional revenue will increase by 2% by the end of 2020.1. What is the revised estimate of the total compensation?2. What action will be taken to account for the options in 2019?3. Prepare the journal entries to record compensation expense in 2019 and 2020.

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Dryomys Dryomys · Answer 1 · 2019-10-14T07:20:50+02:00

Answer:

(a)

Revised estimate of the total compensation:

= No. of stocks options issued × Estimated fair value of each option

= 200,000 × $6

= $1,200,000

(b) To account for the options in 2019, company Farmer Fabrication will reflect the cumulative effect of compensation in 2019 earnings.

(c) The journal entries to record compensation expense in 2019 and 2020 are as follows:

In 2019,

Compensation expense (1,200,000 × 2/4) A/c Dr. 600,000

To paid in capital stocks options 600,000

In 2020,

Compensation expense [(1,200,000× 3/4) - $600,000)] A/c Dr. 300,000

To paid in capital stocks options 300,000