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 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 an equity-classified award. Each executive is required to complete a 2-year service period in order to exercise the options.

Required

a. Assuming no changes in vesting probability, prepare the journal entries required to record compensation expense over the vesting period.

b. Prepare all journal entries required in Year 2 assuming that the vesting probability is reduced to 60% in Year 2. Assume that the company chooses to adjust the fair value for the estimated forfeitures.
c. Using the information computed from pan (b). prepare the journal entry required to record the expiration of all options.
d. Prepare all journal entries in Year 1 and Year 2 assuming that 20% of the options are forfeited in Year 1 and another 20% are forfeited in Year 2. Assume that the company accounts for forfeitures when they occur.