9-

On January 1, 2021, Farmer Fabrication issued stock options for 600,000 shares to a division manager. The options have an estimated fair value of $11 each. To provide additional incentive for managerial achievement, the options are not exercisable unless divisional revenue increases by 5% in three years. Suppose that Farmer initially estimates that it isnotprobable the goal will be achieved, but then after one year, Farmer estimates that it is probable that divisional revenue will increase by 5% by the end of 2023.

Required:

1.What is the revised estimate of the total compensation?

2.What action will be taken to account for the options in 2022?

3.Prepare the journal entries to record compensation expense in 2022 and 2023.