On October 1, 2018, Farmer Fabrication issued stock options for 600,000 shares t
ID: 2527004 • Letter: O
Question
On October 1, 2018, Farmer Fabrication issued stock options for 600,000 shares to a division manager. The options have an estimated fair value of $11 each. To provide additional incentive for managerial achievement, the options are not exercisable unless divisional revenue increases by 5% 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 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.
Explanation / Answer
Answer 1
Revised estimate of the total compensation = Shares issued for Stock Options * Fair value per option.
= 600,000 shares * $11 = $6,600,000
Answer 2
Action to be taken to account for the options in 2019 = Farmer Fabrication should show the total or cumulative effect of compensation expenses on earnings of 2019 . Thus in 2019 , Compensation expenses charged to earnings for the year 2019 = $6,600,000 * 2 / 3 = $4,400,000
Answer 3
Date Particulars Debit ($) Crebit ($) December 31 , 2019 Compensation expenses 4,400,000 Paid - in Capital - Stock options 4,400,000 (To record compensation expenses for the year) December 31 , 2020 Compensation expenses ($6,600,000 - $4,400,000) 2,200,000 Paid - in Capital - Stock options 2,200,000 (To record compensation expenses for the year)Related Questions
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