Question

On January 1, 2018, Farmer Fabrication issued stock options for 360,000 shares to a division manager. The options have an estimated fair value of $8 each. To provide additional incentive for managerial achievement, the options are not exercisable unless divisional revenue increases by 2% in five years. Suppose that after one year, Farmer estimates that it is not probable that divisional revenue will increase by 2% in five years. 1. What is the revised estimate of the total compensation? 2. What action will be taken to account for the options in 2019?

Answer 1

Answer: There is no revised estimate the option is still open to be exercise as agreed.

2. A report will be included in the 2019 financial report of the existence of the option.

Explanation:

The conditions attached to the option is the increase in revenue by 2% in five years and since we are in the first year no revision can be made to the option.

The existence of the option has to be mentioned in 2019 Financial report has a way of accounting for it's existence.