3 On October 1, 2018, Farmer Fabrication issued stock options for 150,000 shares

Question

3 On October 1, 2018, Farmer Fabrication issued stock options for 150,000 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 3% in three 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 3% by the end of 2020. 10 points 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 eBook Print Complete this question by entering your answers in the tabs below References Req 1 and 2 Req 3 What is the revised estimate of the total compensation and what action will be taken to account for the options in 2019? 1. Estimate total compensation 2. What action will be taken to account for the options in 2019? armer will reflect the cumulative effect on compensation in 2019 earnings.

Explanation / Answer

1. The estimate of the total compensation would be: 150,000 x $5=$750000 2. Farmer would reflect the cumulative effect on compensation in 2019 earnings Journal Entry Date Account Tittle Debit Credit 31-Dec-19 Compensation expense ([$750000 x 2/3] – 0) 500000 Paid-in capital – stock options 500000 31-Dec-20 Compensation expense ([$750000 x 3/3] – $500000) $250,000 Paid-in capital – stock options $250,000

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