Question

Munster Company issued options to a key executive that are contingent on the company achieving a 10% increase in sales revenue within the next 12 months. The company believes that it is likely that this target will be achieved and accrues $5 million in related compensation expense. After 9 months, the company estimates that it is possible, but not likely that the target will be achieved.

Based on this new estimate, the company must ___________.

Answer 1

Answer: Credit compensation expense for $5million

Explanation: Given the condition involved in the option issue to the executive, which involves the company achieving a 10% increase in sales within the next 12 months, which at first the company believes it's achievable, and hence and hence accruing $5million in compensation expense. But since achieving that target became very unlikely after 9 months, compensation expense will have to be credited for $5million based on the most recent estimation.