In: Accounting
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.
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.
1.Revised estimate of the total compensation
The estimate of the total compensation would be:
200,000 × $ 6 = $12,00,000
2.Amount of Expenses to be recognized in each Year
One-third of that amount will be recorded in each of the three years.
In 2018 = $ 12,00,000 x1/3 = $ 4,00,000
In 2019 = $ 12,00,000 x1/3 = $ 4,00,000
In 2020= $ 12,00,000 x1/3 = $ 4,00,000
3.Journal entries to record compensation expense in 2019 and 2020
In 2019
Employees Compensation Expenses A/c Dr $ 4,00,000
To Employees Stock Option outstanding A/c Cr $ 4,00,000
(Entry to recognize the compensation expenses)
Profit and Loss A/c Dr $ 4,00,000
To Employees Compensation Expenses A/c Cr $ 4,00,000
(Transfer of Compensation expenses to P&L A/c)
In 2020
Employees Compensation Expenses A/c Dr $ 4,00,000
To Employees Stock Option outstanding A/c Cr $ 4,00,000
(Entry to recognize the compensation expenses)
Profit and Loss A/c Dr $ 4,00,000
To Employees Compensation Expenses A/c Cr $ 4,00,000
(Transfer of Compensation expenses to P&L A/c)