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?

Question

01-05-2021
Business

Answered

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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?

Sagot :

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