On January 1, 2021, Farmer Fabrication issued stock options for 100,000 shares to a division manager. The
Question:
On January 1, 2021, Farmer Fabrication issued stock options for 100,000 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 after one year, Farmer estimates that it is not probable that divisional revenue will increase by 5% in three years.
Required:
1. What is the revised estimate of the total compensation? ( my answer was 600,000. It is not correct)
2. What action will be taken to account for the options in 2022?
3. What journal entry will be needed to account for the options in 2022? ( compensation expense debit for 400,000 and credit to paid in capital for 400,000. Is not correct)
Intermediate Accounting
ISBN: 978-1260481952
10th edition
Authors: J. David Spiceland, James Sepe , Mark Nelson, Wayne Thomas