On January 1, 2024, Farmer Fabrication issued stock options for 100,000 shares to a division manager. The options have an estimated fair value of $6 each. To provide additional incentive for managerial achievement, the options are not exercisable unless divisional revenue increases by 5% in three years. Suppose that after one year, Farmer estimates that it is not probable that divisional revenue will increase by 5% in three years. Required: What is the revised estimate of the total compensation? What action will be taken to account for the options in 2025? What journal entry will be needed to account for the options in 2025?

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...
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On January 1, 2024, Farmer Fabrication issued stock options for 100,000 shares to a division manager. The options have an estimated fair value of $6 each. To provide additional incentive for managerial achievement, the options are not exercisable unless divisional revenue increases by 5% in three years. Suppose that after one year, Farmer estimates that it is not probable that divisional revenue will increase by 5% in three years.

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  1. What is the revised estimate of the total compensation?
  2. What action will be taken to account for the options in 2025?
  3. What journal entry will be needed to account for the options in 2025?
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