On January 1^st of Year 1, Kitty’s Korner Stores, Inc., granted 30,000 options to acquire 30,000 shares of $2 par value common stock at an exercise price of $36 per share. The options vest in three years on January 1^st of Year 4 and expire on January 1^st of year 11. A binomial option pricing model was used to determine the fair value of the award resulting in a value of $12 per share. Kitty’s uses the expected forfeiture rate method. The initial expected forfeiture rate is 0% or the vesting probability is 100%.

REQUIRED:

1. Prepare any journal entries or entries required at the date of the grant.
2. Prepare the journal entries required for each year of the vesting period.
3. Assume that all options are exercised on December 31^st of Year 5. Prepare the journal entry to record the exercise of the options.
4. Assume that all options expire. Prepare the journal entry to record the expiration of the options on December 31^st of Year 11.
5. Independent of your responses to Parts a – d, prepare the journal entries required to recognize compensation expense for each year of the vesting period assuming the company used the following vesting probabilities:

• Year 1 = 100%
• Year 2 = 70%
• Year 3 = 45%