Employee Stock Options, Liability- classified, Journal Entries. Max Ferguson Cosmetics compensates its key employees by offering stock options as part of total compensation. On January 1 of the current year, Max Ferguson granted 10,000 options to acquire 10,000 shares of its $ 2.00 par value common stock at an exercise price of $ 18 per share. The market price on the date of the grant is also $ 18 per share so there is no intrinsic value. At the grant date, the fair value of the options is $ 250,000 or $ 25 per option. The initial vesting probability is assumed to be 100%. The option plan qualifies as a liability-classified award. Each executive is required to complete a two-year service period in order to exercise the options.

Required
a. Prepare the journal entry required on the date of the grant.
b. Assuming no changes in vesting probability, prepare the journal entries required to record compensation expense over the vesting period.
c. Prepare all journal entries required in year two, assuming that the vesting probability is reduced to 60%.
d. Using the information computed from part c, prepare the journal entry required to record the expiration of all options.