INTERMEDIATE FINANCIAL ACCOUNTING II TIPTON INC. STOCK OPTIONS On January 1, 2005, Tipton Inc. granted stock options to officers for the purchase of 20,000 shares of the company's $10 par value common stock at $25 per share. The options were exercisable within a 5-year period beginning January 1, 2007 by grantees still in the employ of the company. All options under this plan expire on December 31, 2011. The market price of Tipton common stock was $32 per share on the date of grant. Tipton elects the shortest service period allowed. Application of the Black-Scholes formula to these options produces a value of $17.50 each at the grant date. Tipton expects a 4% forfeiture rate per year. During 2006 2,000 options are forfeited when a specific employee resigns from the company. This leaves exactly 18,000 options outstanding on December 31, 2006. The market value of the shares at the time of the termination was equal to $35.00 per share. On March 31, 2007 a total of 12,000 options were exercised when the market value of the shares was $40 per share. Tipton's tax rate is 40% for the entire period. NOTE: You may ignore the tax effects when completing this assignment Required: Prepare the entries required at: 1. 12/31/05 to record any necessary compensation cost for 2005. 2. 12/31/06 to record the appropriate amount of compensation expense for 2006. 3. 3/31/07 to record the exercise of the 12,000 options.