Question

On January 1, 2021, Farmer Fabrication issued stock options for 420,000 shares to a division manager. The options have an estimated fair value of $9 each. To provide additional incentive for managerial achievement, the options are not exercisable unless divisional revenue increases by 5% in five years. Suppose that after one year, Farmer estimates that it is not probable that divisional revenue will increase by 5% in five years.
Required:
1. What is the revised estimate of the total compensation?
2. What action will be taken to account for the options in 2022?
3. What journal entry will be needed to account for the options in 2022?

Answer 1

Answer and Explanation:

The computation and the journal entry is

1 The revised estimated total compensation = 0  

2 The Farmer will able to reverse the 2021 recorded compensation  

3 The journal entry is

Paid in capital-stock options $756,000 ($420,000 × 9)/5

    Compensation expense $756,000

(Being the journal entry for the option is recorded)

Here the paid in capital would be debited as it decreased the equity and the compensation expense is credited as it decreased the liability