On 1/1/x4, Jennings Co. entered into a compensation contract with a few top executives. The contract granted 10k options for the purchase of 10k shares (total) of Jennings common stock (par $1) at a price of $20 per share. Options are exercisable after 12/31/x7 (the period of benefit is designated as 1/1/x4 through 12/31/x7). Assume the options are exercised on 1/1/x8. The following closing prices are observed for Jennings Co. stock:

1/1/x4 12/31/x4 12/31/x5 12/31/x6 1/1/x7 1/1/x8

$20 $15 $23 $4 $4 $9

a. Suppose Jennings used the Black-Scholes option pricing model in accordance with SFAS 123R. If the model estimated the value of the options as $75,000 on 1/1/x4, and no forfeitures are expected, then the total compensation expense to be recognized over the service period would be _______________[75]

b. Same data as part a. above, but assume Jennings estimates on 1/1/x4 that forfeitures will be 4% of the original award each year. Total compensation cost for all years is _______________.[63k]

c. Same data as parts a. and b. above, but assume Jennings determines on 1/1/x6 that forfeitures will only be 10% total, not 4% each year. Compensation Expense for years x6 and x7 are _______________[19125, 16875]

d. Suppose now that during year x6 geopolitical events beyond the control of Jennings management have caused a major stock market adjustment downward, and the Jennings stock is trading well below the option striking price. On 1/1/x7, management thus changes the terms of the options award to the following: 20k options for 20k shares total, k = $4 (same lapse date and forfeitures as in c. above). Using a binomial lattice model, management estimates the award fv on 1/1/x7 is $65k. Provide the entries Jennings will make in year x7, and record exercise on 1/1/x8.[x7 comp exp: 7875] -------------------------------------------