Vasalia Co. grants 500 shares to each of its 35 employees at the beginning of year 1, conditional on the employee remaining in the company’s employ during the 3-year vesting period. The shares have a fair value of $9 per share at grant date. No dividends are expected to be paid over the 3-year period. The vesting conditions allow the shares to vest at the end of:

• Year 1, if the company’s earnings have increased by more than 22%

• Year 2, if earnings have increased by more than 19% averaged across the 2-year period

• Year 3, if earnings have increased by more than 12% averaged across the 3-year period

By the end of year 1, the company’s earnings increased by just 20% and seven employees have left. The company expects that earnings will continue to increase at a similar rate in year 2 and the shares will vest at the end of year 2. It also expects that a further three employees will leave during year 2.

By the end of year 2, the company’s earnings have increased by just 15%, resulting in an average of only 17.5%, so the shares do not vest. Four employees left during the year. The company expects that another two employees will leave during year 3 and that its earnings will increase by 20%, hence the shares will vest at the end of year 3.

During year 3, another three employees left and the company’s earnings have increased by 15%, resulting in an average increase of 12% over the 3-year period. Therefore, the performance condition has been satisfied. The remaining employees are entitled to receive 500 shares each at the end of year 3.

Instruction:

Prepare a schedule of expense and cumulative expense that must be recorded by Vasalia Co. at the end of each year.