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On October 1, 2018, Farmer Fabrication issued stock options for 180,000 shares to a division manager....

On October 1, 2018, Farmer Fabrication issued stock options for 180,000 shares to a division manager. The options have an estimated fair value of $5 each. To provide additional incentive for managerial achievement, the options are not exercisable unless divisional revenue increases by 5% 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 5% by the end of 2020.

Required:

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.

Solutions

Expert Solution

1. What is the revised estimate of the total compensation?

stock options

         180,000

Multiply: Fair value

                      5

estimate of the total compensation

         900,000

2. What action will be taken to account for the options in 2019?

Farmer Fabrication will reflect cumulative effect on compensation in 2019 earnings

3. Prepare the journal entries to record compensation expense in 2019 and 2020.

Date

General journal

debit

Credit

2019

Compensation expense

         450,000

Paid in capital – stock options

         450,000

(To record Compensation expense.)

2020

Compensation expense

         225,000

Paid in capital – stock options

         225,000

(To record Compensation expense.)

Compensation expense For Year 2019 (900000*2/4)

         450,000

Cumulative Compensation expense Up to Year 2020 (900000*3/4)

         675,000

Less: recognized in earlier year

         450,000

Compensation expense For Year 2020

         225,000

ekkarill92 answered 1 year ago
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