On January $1,2024,$ Farmer Fabrication issued stock options for $600,000$ shares to a division manager. The options have an estimated fair value of $$11$ each. To provide additional incentive for managerial achievement, the options are not exercisable unless divisional revenue increases by $5\%$ in three years. Suppose that Farmer initially estimates that it is not probable the goal will be achieved, but then after one year, Farmer estimates that it is probable that divisional revenue will increase by $5\%$ by the end of $2026.$

Required:

What is the revised estimate of the total compensation?

What action will be taken to account for the options in $2025?$

Prepare the journal entries to record compensation expense in $2025$ and $2026.$

Complete this question by entering your answers in the tabs below.

Req $1$ and $2$

Req $3$

What is the revised estimate of the total compensation and what action will be taken to account for the options in $2025?$

Estimate total compensation

What action will be taken to account for the options in $2025?$

Farmer will reflect the cumulative effect on compensation in $2025$ earnings.