Argon Company compensates its key employees by offering stock options as part of total compensation. On January 1 of the current year, Argon granted 88,000 options to acquire 88,000 shares of its $3.00 par value common stock at an exercise price of $40 per share. The market price on the date of the grant is also $40 per share, so there is no intrinsic value. At grant date, the fair value of the options is $5,280,000, or $60 per option. The initial vesting probability is assumed to be 40%. The option plan qualifies as an equity-classified award. There is a 2-year vesting period required before employees can purchase the shares.

Requirement

a. Assuming no changes in vesting probability, prepare the journal entries required to record compensation expense over the vesting period. (Record debits first, then credits. Exclude explanations from any journal entries.)

First, prepare the entry to record compensation expense for Year 1.

Account	December 31, Year 1

Now, prepare the entry to record the compensation expense for Year 2.

Account	December 31, Year 2

Requirement

b.

Prepare all journal entries required in Year 2 assuming that the vesting probability increases to 80%.

Assume that the company chooses to adjust the fair value for the estimated forfeitures. (Record debits first, then credits. Exclude explanations from any journal entries.)

Prepare the entry to record the compensation expense for Year 2.

Account	December 31, Year 2

Requirement

c. Assume that employees exercise 60% of the options expected to vest from part (b) and the other 40% expire. Prepare any journal entries required to record the exercise and expirations. (Record debits first, then credits. Exclude explanations from any journal entries.)Prepare the journal entry to record the exercise assuming that employees exercise 60% of the options.

Account	Exercise date

Now, prepare the entry to record for the expirations assuming that 40% of the options expired.

Account	Expiration date

Requirement d. Assume that 30% of the options are forfeited in Year 1 and another 30% are forfeited in Year 2. Assume that the company accounts for forfeitures when they occur. Prepare all journal entries in Year 1 and Year 2, including the journal entry to record the exercise of the options.

First, prepare the entry to record the compensation expense for Year 1.

Account	December 31, Year 1

Now prepare the entry to record the compensation expense for Year 2.

Account	December 31, Year 2

Finally, prepare the entry to record the exercise of the options.

Account	December 31, Year 2