Question

On October 1, 2018, Farmer Fabrication issued stock options for 400,000 shares to a division manager....

On October 1, 2018, Farmer Fabrication issued stock options for 400,000 shares to a division manager. The options have an estimated fair value of $7 each. To provide additional incentive for managerial achievement, the options are not exercisable unless divisional revenue increases by 4% in five 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 4% 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.

Homework Answers

Answer #1

1. The Total Compensation will be 400,000*$7 = $2,800,000

2. As the Farmer intial estimates states that it is not probable, they will defer the compensation expense till completion of five years. so, for December 31, 2018, it will record compensation expense for 3 months i.e ($2,800,000/5/12)*3 = $140,000. In the question, it says "But then After one year" it means October 1, 2019 they decided it will increase by 4% by the end of 2020. That means the remaining compensation expense should be recognized in the coming two years.

3. Journal Entry in 2019

Compensation Expense A/C       DR        $1,330,000 ({$2,800,000-$140,000}/2)

                Income Statement                               $1,330,000

   Journal Entry in 2020

Compensation Expense A/C      DR        $1,330,000

     Income Statement                                $1,330,000

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
On October 1, 2018, Farmer Fabrication issued stock options for 400,000 shares to a division manager....
On October 1, 2018, Farmer Fabrication issued stock options for 400,000 shares to a division manager. The options have an estimated fair value of $7 each. To provide additional incentive for managerial achievement, the options are not exercisable unless divisional revenue increases by 4% in five 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 4%...
On October 1, 2016, Farmer Fabrication issued stock options for 280,000 shares to a division manager....
On October 1, 2016, Farmer Fabrication issued stock options for 280,000 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 2% in four years. Suppose that after one year, Farmer estimates that it is not probable that divisional revenue will increase by 2% in four years. 1. What is the revised estimate of the total compensation? 2....
On January 1, 2021, Ace Co issued stock options for 340,000 shares to a division manager....
On January 1, 2021, Ace Co issued stock options for 340,000 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 5% in three years. Suppose that Ace Co initially estimates that it is not probable the goal will be achieved, but then after one year, Ace Co estimates that it is probable that divisional revenue will increase...
On January 1, 2020, Company A issued stock options for 828 shares to a executive. The...
On January 1, 2020, Company A issued stock options for 828 shares to a executive. The options have an estimated fair value of $9 each. To provide additional incentive for managerial achievement, the options are not exercisable unless Company A's stock price increases by 5% in six years. Company A initially estimates that it is not probably the goal will be achieved. How much compensation will be recorded in 2020? Group of answer choices $2,484 No compensation should be recorded...
On July 1, 2018, Stellar Company adopted a stock option plan that granted options to key...
On July 1, 2018, Stellar Company adopted a stock option plan that granted options to key executives to purchase 100,000 shares of the company’s $1 par value common stock. The options were granted on January 1, 2019, and were exercisable 3 years after the date of grant if the grantee was still an employee of the company. The options expired 4 years from date of grant. The option price was set at $66, and the fair value option pricing model...