Weiser Corp. on January 1, 2007, granted stock options for 40,000 shares of its $10 par value common stock to its key employees. The market price of the common stock on that date was $23 per share and the option price was $20. The Black-Scholes option pricing model determines total compensation expense to be $240,000. The options are exercisable beginning January 1, 2010, provided those key employees are still in Weiser's employ at the time the options are exercised. The options expire on January 1, 2011.
On January 1, 2010, when the market price of the stock was $29 per share, all 40,000 options were exercised.
Instructions:
1) What amount of compensation expense should Smiley recognize as a result of this plan for the year ended December 31, 2010 under the fair value method?
2) Prepare journal entries relating to the stock option plan for years 2010, 2011, and 2012. Assume that the employee performance services equally in 2010 and 2011.