Element Inc. is a producer of leading-edge medical equipment. The company has always had competitive compensation packages for its employees. At the beginning of 20X5, 100 employees were awarded a total of 20,000 options at an exercise price of $10 per share. Each employee will receive 200 options. The options are equity-settled and vest 3 years after they are granted. Using an option pricing model, the fair value of the options is $102,000.
The historical forfeiture rates for options are as follows:

In 20X2, forfeiture rates were significantly higher due to a corporate restructuring that took place during the year.

Required:
1. Prepare a discussion around the most appropriate forfeiture rates to use for the 20X5 options granted.
2. Using the information obtained in requirement 1, calculate the compensation expense for the 20X5 grant in 20X5, 20X6, and 20X7.

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Percentage 16 14 12 10 8 6 2 0 1996 20X0 grant 9% 20X1 grant 15% 12% 8% 20X2 grant 5% Actual forfeiture rates 1st year Element Inc. Actual Forfeiture Rates by Grant Year 20X3 grant 8% 20X4 grant 10% 7% Grant year Actual forfeiture rates 2nd year Actual forfeiture rates 3rd year 5% Average