Schmidt Electronics offered an incentive stock plan to its employees. On January 1, Year 1, 90,000 options were granted for 90,000 $1 par common shares. The exercise price equals the $6 market price of the common stock on the grant date. The vesting period is 3 years. The options cannot be exercised before January 1, Year 4, and expire on December 31, Year 5. Each option has a value of $3 based upon an option pricing model. At the end of the first year, it is expected that 100% of employees will exercise the options. By the end of Year 2, it is expected that only 80% of the options will be exercised. Assume that Schmidt chooses to adjust the fair value of the options for the estimated forfeitures.
What is the journal entry to recognize compensation expense and record the change in vesting probability in Year 2? (Do not round intermediate calculations. Only round your final answer to the nearest dollar.)

Question

Quizplus · Accepted Answer

In Year 2, the compensation expense is adjusted for the expected forfeiture rate. Initially, 90,000 options were expected to be exercised, but now only 80% (72,000 options) are expected. The total compensation cost is 72,000 options x $3 = $216,000. Since Year 2 is the second year of the vesting period, the cumulative expense is $216,000 x 2/3 = $144,000. Year 1 expense was $90,000, so Year 2 expense is $144,000 - $90,000 = $54,000. The journal entry is to debit Compensation Expense and credit APIC - Stock Options for $54,000.