1. At the beginning of year 1, an entity grants 100 share options to each of its 200 employees. Each grant is conditional upon the employee remaining in service over the next three years. The entity estimates that the fair value of each option is $21. On the basis of a weighted average probability, the entity estimates that 60 employees will leave during the three-year period and therefore forfeit their rights to the share options.

Suppose that 15 employees leave during year 1. Also suppose that by the end of year 1, the entitys share price has dropped, and the entity reprices its share options, and that the repriced share options vest at the end of year 3. The entity estimates that a further 35 employees will leave during years 2 and 3. During year 2, a further 10 employees leave, and the entity estimates that a further 10 employees will leave during year 3. During year 3, a total of 8 employees leave.

The entity estimates that, at the date of repricing, the fair value of each of the original share options granted (ie before taking into account the repricing) is $10 and that the fair value of each repriced share option is $13. The amount to be recognized as expense in year 2 is

a. $159,000 c. $150,750 b. $105,000 d. $135,750

2. On December 31, 2010, Heerey Company granted some of its executives options to purchase 60,000, $50 par, ordinary shares of the company at an option price of $60 per share. The Black-Scholes option pricing model determines total compensation expense to be $1,200,000. The options become exercisable on January 1, 2011, and represent compensation for executives' past and future services over a three-year period beginning January 1, 2011. What is the impact on Heerey's total shareholders' equity for the year ended December 31, 2010, as a result of this transaction?

a. $1,200,000 decrease b. $ 400,000 decrease c. $ 400,000 increase d. $ 0