Davidson Company compensates its key employees by offering stock options as pan of total compensation. On January 1 of the current year, Davidson granted 80,000 options to acquire 80,000 shares of its $1 par value common stock m 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 2-year vesting period required before employees can purchase the shares.

Required

a. Assuming no changes in vesting probability, prepare the journal entries required to record compensation expense over the vesting period.

b. Prepare all journal entries required in Year 2 assuming that the vesting probability increases to 80% in Year 2. Assume that the company chooses to adjust the fair value for the estimated forfeitures.

c. Assume that employees exercise 80% of the options expected to vest from part (b) and the other 20% expire. Prepare any journal entries required to record the exercise and expiration's.

d. Assume that 20% of the options are forfeited in Year 1 and another 20% are forfeited in Year 2. Assume that the company accounts for forfeitures when they occur. Prepare all journal entries in Year 1 and Year 2, including the journal entry to record the exercise of the options.