Pacific Trading Co. has a SARs program for managers. These individuals receive a cash payment after three years of service, calculated as the excess of share price over $10. In early 20X3, the 30 members of the management team in total are granted 25,000 units in the program. The payment is made at the end of 20X5. Data on estimated and actual retention are:

The fair value of one SARs unit is estimated at $3 at the end of 20X3 and $12 at the end of 20X4.
The actual share price is $19 at the end of 20X5.

Required:
1. Provide the entry to record compensation expense in each year of the SARs plan, including the entry for cash payment in 20X5.
2. What evidence suggests that the level of retention must be revised for 20X4?
3. Describe how the accounting for this compensation scheme would be different if the employees could choose between cash and shares at settlement.

End of Year Employees expected to remain until vesting Employees expected to forfeit Employees actually forfeiting in the year Employees actually receiving SARS (308) 20X3 25 (83%) 5 (17%) 1 20X4 24 (80%) 6 (20%) 4 20X5 n/a n/a 3 22 (73.3%)