Five vice-presidents of Spinner Entertainment Ltd. are awarded units in a phantom stock plan at the beginning of 20X5. At the end of 20X7, after three years of employment, each vice president is entitled to receive either:
• 7,000 common shares; or
• Cash equal to the market value of 5,000 shares.
At the time of the grant, the shares had a market value of $25, and valuation models indicated that the share alternative was worth $27.50 per share. Based on this information, the equity portion of the plan was valued at $337,500 for accounting purposes. The share price was $21 at the end of 20X5, $27 at the end of 20X6, and $25 at the end of 20X7. The fair value of the cash alternative is to be based on the intrinsic value of the plan on each reporting date. All vice-presidents were expected to stay with the company, and all did. Four of the five executives elected to take cash in 20X7, and the remaining vice-president took shares.

Required:
1. Verify the $337,500 option value at the inception of the plan.
2. Prepare the entries to record the annual expense entries and disbursement in 20X5, 20X6, and 20X7.