On January 1, Year 1, the board of directors of Sycamore Company granted a total of 45,000 stock options to its executive employees. On that day, the market price of its $1-par common stock was $25 per share, and the estimated fair value of each option was $6. The options vest on December 31, Year 3, and are exercisable between January 1, Year 4 and December 31, Year 6. Each option allows the executive to purchase one share of common stock for $25. As of January 1, Year 1, the company expects no forfeitures, and will revise that estimate at the end of each year before recording compensation expense.

Assumption 1: At exercise, the executive will pay the exercise price and receive shares, which may then be traded in the open market or held, at the executives decision. These options will be accounted for as equity.

Assumption 2: At exercise, the executive will pay the exercise price and receive shares. The executive then has the choice to either hold the shares or require the company to repurchase the shares from the executive at the current market price. These options will be accounted for as a liability. Note that the repurchase of the shares, if elected, is a separate transaction.

The expected forfeitures, actual closing market price of the stock, the estimated fair value of each option on December 31 of each year is given in the table below. Note that only 80% of the options vested.:

Dec. 31	Forfeitures	Market Price	Option Fair Value
Year 1	15%	28.00	7.50
Year 2	10%	29.00	6.50
Year 3	20% (actual)	32.00	7.00
July 1, Year 4		32.50	7.50

Requirements:

1. Show the calculation to determine expected compensation expense as of January 1, Year
2. For Assumption 1, prepare the journal entries to record compensation expense for Year 1 through Year 3, and to record the exercise of all vested options on July 1, Year 4. Provide all calculations.
3. For Assumption 2, prepare the journal entries to record compensation expense for Year 1 through Year 3, and to record the exercise of all vested options on July 1, Year 4. Provide all calculations.