Davidson Company compensates its key employees by offering stock options as part of total compensation. On January 1 of the current year, Davidson granted 80,000 options to acquire 80,000 shares of its $ 1.00 par value common stock at an exercise price of $ 37 per share. The market price on the date of the grant is also $ 37 per share so there is no intrinsic value. At grant date, the fair value of the options is $ 4,000,000 or $ 50 per option. The initial vesting probability is assumed to be 60%. The option plan qualifies as an equity-classified award. There is a two-year vesting period required before employees can purchase the shares.
Required
a. Prepare the journal entry required on the date of the grant.
b. Assuming no changes in vesting probability, prepare the journal entries required to record compensation expense over the vesting period.
c. Prepare all journal entries required in year two, assuming that the vesting probability increases to 80%.
d. Using the information provided in part c, assume that employees exercise 80% of the options and the other 20% expire. Prepare any journal entries required to record the exercise and expirations.