On 2 January 20x1, Alcato Company introduced an executive share option plan for its top ten executives. Under the plan, each executive was granted 100,000 share options that gave them the right to subscribe to one ordinary share for each share option. The exercise price was $3, which was also the market price at the date of the grant. The exercise price was to be reduced by the percentage increase in net earnings from 31 December 20x0 to 31 December 20x3. The fair value of each share option (estimated at $1.50 at grant date) is estimated to increase by 1% for every 1% decrease in the exercise price. The holder of the options must remain in the employ of Alcato Company through the earliest exercise date, which was 31 December 20x3. The options would expire five years after the grant date.

Alcato Company did not expect any of the ten executives to leave the company during the vesting period. None of the executives left the company. All of them exercised their options on 1 January 20x4 when the price of Alcato’s share was $5. Ignore taxation.

Required

1. Calculate the remuneration expense for each year assuming that the expected increase in net earnings over the three-year period was 25% at the end of 20x1 and 30% at the end of 20x2. The actual increase in net earnings over the three-year period at 31 December 20x3 was 33%.
2. Prepare all the journal entries relating to the share options.