Ernest Builders, Inc. initiated a stock option plan for its employees on January 1 of the current year. The terms of the plan grant each employee 10 options to acquire 10 shares of the company's $1 par value, common stock at an exercise price of $35 per share. The market price on the date of the grant is also $35 per share. On the grant date, a binominal model estimated the fair value of the options at $92 per share. The option plan permits exercise only after 3 years of service and all options expire after 6 years. On the date of the grant, Ernest employed 1,500 employees. The options are equity-classified awards. Read the requirements. Requirement a. Assuming that the initial vesting probability is 100%, prepare the necessary journal entries. (Record debits first, then credits. Exclude explanations from any journal entries.) Prepare the entry to record the recognition of compensation expense at the end of Year 1 assuming that the fair value of the options was $84 at the end of Year 1. Account Dec. 31, Year 1 1 Requirements . Prepare the entry to record the recognition of compensation expense at the end of Year 2 assuming that the fair value of the options was $77 at the end of Year 2. . Account Dec. 31, Year 2 a. Assuming that the initial vesting probability is 100%, prepare the journal entries necessary: To record the recognition of compensation expense each year assuming that the fair value of the options was as follows: $84 per share at the end of the year of the grant. $77 and $92 per share at the end of Year 2 and Year 3, respectively, following the year of the grant. b. Assuming the company chooses to adjust the fair value for the estimated forfeitures. Repeat the requirements in part (a), assuming that the estimated vesting probabilities are: 90% at the beginning of Year 1. 65% at the beginning of Year 2. 70% at the beginning of Year 3. c. Repeat the requirements in part (a) assuming that Ernest grants the options to acquire the company's redeemable preferred shares rather than its common stock. . Prepare the entry to record the recognition of compensation expense at the end of Year 3 assuming that the fair value of the options was $92 at the end of Year 3. Account Dec. 31, Year 3 Print Done Requirement b. Repeat the requirements in parlal, assuming that the estimated vesting proteolilies are 90% at the beginning of Year 1,65% at the beginning of Year 2 and 70% at the beginning of Year 3. (Record delis lirel, el crecils. Exduce explorations from any journal entries.) Prepare the city to record the recognition at campereation expense at the end of Year 1 assuming that she estimated vesting probability is 90% at the beginning of Year 1 andre fair value of the option was $44 z4 the end of Year 1. Account Dec. 31, Year 1 Prepare the entry to record the recognion of compensation expense at the end of Year 2 88uming at the estimated vesting probability is 65% at the beginning of Year 2 and the fair value of the operis was 377 & the end of Year 2 Accowi Dec 31. Year 2 Prepare the entry to record the region of compensation expense at the end of Year 3 surning that the estimated vesting probability is 70% at the beginning of Year 3 and the fair value of the opcones was 392 at the end of Year 3. Account Dec. 31, Year 3 Requirement c. Repeat the requirements in part(a) assuming that Ernest grants the options to acquire the company's redeemable preferred shares rather than its common stock. (Record debits first, then crecits. Exclude explanations from any journal entries.) Prepare any entry to record the recognition of compensation expense at the end of Year 1 assuming that the fair value of the option was 584 at the end of Year 1 Account Dec. 31. Year 1 Prepare any entry to record the recognition of compensation expense at the end of Year 2 assuming that the fair value of the options was $77 at the end of Year 2. Account Dec. 31, Year 2 Prepare any entry to record the recognition of compensation expense at the end of Year 3 assuming that the fair value of the options was $92 at the end of Year 3. Account Dec. 31, Year 3
