On October 1 2018 Farmer Fabrication issued stock options fo

On October 1, 2018, Farmer Fabrication issued stock options for 420,000 shares to a division manager. The options have an estimated fair value of $10 each. To provide additional incentive for managerial achievement, the options are not exercisable unless divisional revenue increases by 2% in three years. Suppose that Farmer initially estimates that it is not probable the goal will be achieved, but then after one year, Farmer estimates that it is probable that divisional revenue will increase by 2% by the end of 2020. Required 1. What is the revised estimate of the total compensation? 2. What action will be taken to account for the options in 20197 3. Prepare the journal entries to record compensation expense in 2019 and 2020. Complete this question by entering your answers in the tabs below

Solution

1. The revised estimate of the total compensation=$420,000*10

=$4200,000

2. Farmer fabrication will reflect the cumulative effect on compensation in 2019 earning.

3. Journal entry to record compensation in 2019 and 2020

Year	Particulars	Amt(dr)	Amt(cr)
2019	Compensation expenses	28,00,000
	Paid in capital- stock option		28,00,000
	(Being expenses for 2019 recorded)
2020	Compensation expenses	14,00,000
	Paid in capital- stock option		14,00,000
	(Being expenses for 2020 recorded)