On January 1, 2021, Farmer Fabrication issued stock options for 260,000 shares to a division manager. The options have an estimated fair value of $7 each. To provide additional incentive for managerial achievement, the options are not exercisable unless divisional revenue increases by 5% 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 5% by the end of 2023. 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. Prepare the journal entries to record compensation expense in 2022 and 2023. Complete this question by entering your answers in the tabs below. Req 1 and 21 Reg 3 What is the revised estimate of the total compensation and what action will be taken to account for the options in 20227 1 Estimate total compensation 2 What action will be taken to account for the options in 20227

On January 1, 2021, Farmer Fabrication issued stock options for 260,000 shares to a division manager. The options have an estimated fair value of $7 each. To provide additional incentive for managerial achievement, the options are not exercisable unless divisional revenue increases by 5% 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 5% by the end of 2023. 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. Prepare the journal entries to record compensation expense in 2022 and 2023. Complete this question by entering your answers in the tabs below. Req 1 and 21 Reg 3 What is the revised estimate of the total compensation and what action will be taken to account for the options in 20227 1 Estimate total compensation 2 What action will be taken to account for the options in 20227

Intermediate Accounting: Reporting And Analysis

3rd Edition

ISBN:9781337788281

Author:James M. Wahlen, Jefferson P. Jones, Donald Pagach

Publisher:James M. Wahlen, Jefferson P. Jones, Donald Pagach

Chapter15: Contributed Capital

Section: Chapter Questions

Problem 7RE: On January 1, 2019, Phoenix Corporation adopts a performance-based share option plan for 25...

See similar textbooks

Similar questions

The manager of Synergy Company's Stock Division projects the following for next year: Sales $221,870 Operating income 82,672 Operating assets 385,373 The manager can invest in an additional project that would require $58,427 investment in additional assets and would generate $9,772 of additional income. The company's minimum rate of return is $6%. What is the residual income for the Stock Division with the additional project. Do not round your intermediate calculations!!!
The executive officers of Welsh Inc. have a performance based compensation plan.The performance criterion of this plan is linked to growth in earnings per share. Whenannual EPS growth is 10%, the executives of Welsh will earn 100% of the shares; ifgrowth is 15%, they earn 125%. If EPS growth, however, is lower than 8%, theexecutives receive no additional compensation.In 2020, Shelly Prince, the financial controller of Welsh, reviews year end estimatesof bad debt expense and warranty expense. She calculates EPS growth of 10%. Amember of the executive mentioned to her that the estimate of bad debt expensemight be decreased, increasing EPS growth to 15%. Shelly is not sure she shouldinclude this because she believes that the current bad debt expense is sound. She doesrecognize though, that a great deal of subjectivity was involved in its computation.Instructionsi. What, if any, is the ethical dilemma facing Shelly Prince? ii. Should Shelly’s knowledge of the compensation plan influence…
On January 1, 2019, Phoenix Corporation adopts a performance-based share option plan for 25 executives, with the number of shares based on the yearly increase in sales. At the end of 2019, based on a 10% increase in sales, it expects that each executive will be granted 150 options and that the fair value of an option expected to vest is 15.75. Phoenix expects a turnover rate of 15% over the 3-year service period. Determine the compensation expense for 2019 for this plan.
The sales revenue of Business Strategy Limited for 2019 is $100 million. The CEO told the sales director in December of 2019 that the board had set a target of $145 million in sales revenue for 2022 and expected that there should be stable annual growth of sales over the 3 years. The board expects the growth rate will be maintained continuously in future years. The market has the same expectation of the board. Business Strategy Limited is expected to pay dividend of $20 per common stock at the end of the year 2020. The market price of the common stock at the beginning of 2020 is $1,000.What is the required rate of return on Business Strategy Limited’s common stock?
A company has net earnings of AED 10,000 for the current vear and suppose the company maintai the same earnings for the next year. The company has 1,000 total outstanding shares during the current year. The company decides to buyback 40% of its shares in the following year. Show how this decision will impact the company's earnings per share?
Catapult Company has a current book value of $35 per share. As the result of an innovative product, the company earned an ROE of 14 percent. An analyst studying Catapult has estimated that the 14 percent ROE will continue for the next three years. At that point, he is uncertain what will happen to ROE, but he does observe that prior to last year, the share price was at a persistent 10 percent premium over book value, and he assumes this will be the case at the end of his three-year forecast. However, management has maintained an average market value over book value of 30 percent. The firm has a dividend payout ratio of 30 percent and the analyst estimates the cost of equity to be 10.2 percent. The intrinsic value per share for Catapult that the analyst will calculate is closest to: A. $49.00 B. $47.00 C. $50.00
Momo, a fast-growing company, will make an earnings announcement three months from now. But you do not know whether it will be positive or negative (i.e., the stock price will go up or down). The current price of the stock is $30 per share. A three-month call with an exercise price of $30 costs $5. A put with the same exercise price and expiration date costs $5. Construct a table and a graph to show the profit/loss (P/L) from the option strategy.
The stock price of Wards Company is currently $35. Wards need to raise $25 million by issuing common stock. Underwriters have informed Wards’ management that it must price the new issue to the public at $40 per share to ensure that all shares will be sold. The underwriters’ compensation will be 8 percent of the issue price, so Wards will net $36.80 per share. The company will also incur expenses in the amount of $392,000. How many shares must Wards sell to net $25 million after underwriting and flotation expenses? Provide the quantitative reasoning/calculations you used to solve this question.
The firm is forecasting its retained earnings equal to $300,000 in the coming year. Once retained earnings have been exhausted, Coleman plans to issue new shares of common stocks to raise capital. Up to $300,000 of new common stock can be sold at a flotation cost of 15%. Above $300,000, the flotation cost would rise to 25%. 7) What is the WACC after retained earnings have been exhausted and Coleman issues up to $300,000 of new common stock with a 15% flotation cost? (Hint: Calculate the new cost of equity, using the DCF method, then find new WACC) answer WACC1= 14% ; WACC=15% 8) What is the WACC if more than $300,000 of new common equity is sold? (Hint: Calculate the new cost of equity, using the DCF method, then find new WACC) 9) Explain in words why new common stock that is raised externally has a higher percentage cost than equity that is raised internally as retained earnings. Under which conditions would it not be appropriate to use internal funding rather than external funding…
Marble Construction estimates that its WACC is 10 percent ifequity comes from retained earnings. However, if the company issuesnew stock to raise new equity, it estimates that its WACC will riseto 10.8 percent. The company believes that it will exhaust itsretained earnings at $2,500,000 of capital due to the number ofhighly profitable projects available to the firm and its limitedearnings. The company is considering the following seven investmentprojects: Project Size IRR A $650,000 14.0% B 1,050,000 13.5 C 1,000,000 11.2 D 1,200,000 11.0 E…
Newman Manufacturing is considering a cash purchase of the stock of Grips Tool. During the year just completed, Grips earned $3.65 per share and paid cash dividends of $1.95 per share (D0=$1.95). Grips' earnings and dividends are expected to grow at 35% per year for the next 3years, after which they are expected to grow 9% per year to infinity. What is the maximum price per share that Newman should pay for Grips if it has a required return of 13% on investments with risk characteristics similar to those of Grips?
Company ABC forecasts to have an earning per share of $8 next year. If the company distributes all its earnings to shareholders as dividends, it will provide investors with a 10% expected return. Instead, company ABC decides to plowback 35% of the earnings at the firm’s current return on equity of 20%. What is the value of the stock before and after the plowback decision?