On January 1 of the current year, Brendan B Fashions granted 100,000 stock options to its division managers. The options are equity- classified awards. The plan permits the division managers to acquire the shares at an exercise price of $ 12 per share. Each option permits the purchase of one share of the company’s $ 2 par value common stock. The options vest in two years and they expire if they are unexercised at the end of five years. On the grant date, the fair value of the options, estimated by an accepted option- pricing model, is equal to $ 45 each.
Required
a. Compute the total compensation cost to be recognized by Brendan B Fashions assuming that the company initially expects no forfeitures to occur.
b. Record the journal entries over the vesting period.
c. Prepare the journal entries required to record the actual exercise assuming that:
• The market price of the stock on the date of exercise is equal to $ 35 per share.
• The market price of the stock on the date of exercise is equal to $ 16 per share.
d. Repeat requirement b, assuming that the estimated amount of forfeitures changed to 20% at the beginning of the second year.
e. Independent of your answers to b, c, and d, prepare the journal entry required if 25% of the options expire unexercised.