Smythe Company has a share appreciation rights plan for its key executives. This SAR plan gives each qualifying executive the right to receive cash, stock, or a combination of both equal to the excess of the quoted market price over the option price of the company’s $10 par common stock on the date of exercise. The key characteristics and requirements of this SAR plan are as follows:

Option price: Market price on date of grant

Service period: 4 years

Exercise limit: Within 6 years after the service period has expired

On January 1, 2006 Sarah Mendelson was granted SARs to 10,000 shares of the company’s common stock under the requirements of the SAR plan. She is expected to complete the service period and receive cash on the date of exercise. On December 31, 2010 Mendelson exercised her rights to receive $27,000 cash and the remainder in common stock. The fair value per SAR was as follows: 12/31/06, $4.00; 12/31/07, $4.10; 12/31/08, $3.80; 12/31/09, $5.50; and 12/31/10, $6.00. The quoted market price per share of common stock was $16 on January 1, 2006 and $22 on December 31, 2010.

Required

1. Prepare a schedule to compute the compensation expense related to this SAR plan for 2006 through 2010.

2. Prepare the journal entries related to the SAR plan on December 31, 2006 through December 31, 2010.