Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Case 18-7 Fashion Inc. Fashion Inc. (Fashion or the Company), an SEC registrant, is a fashion retailer that sells men's and women's clothing and accessories.

Case 18-7 Fashion Inc. Fashion Inc. ("Fashion" or "the Company"), an SEC registrant, is a fashion retailer that sells men's and women's clothing and accessories. As an incentive to its employees, the Company established a compensation incentive plan in which a total of 100,000 options were granted on January 1, 20X1. On that date (the grant date), Fashion's stock price was $15.00 per share. The significant terms of the incentive plan are as follows: The options have a $15.00 "strike" or exercise price (the price the employee would pay to purchase a share of stock if the options vest). For the options to vest, the following must occur: o The employee must continue to provide service to the Company throughout the entire explicit service period of five years (i.e., a five-year "cliff-vesting" award). o The Company must achieve annual sales of at least $20 million during the fifth year of the explicit service period. o The Company's share price must increase by at least 25 percent over the five-year explicit service period. In addition, if the Company achieves sales of at least $25 million during the fifth year of the explicit vesting period, the strike price of the options will decrease from $15 to $10. The options expire after 10 years following the grant date. The options are classified as equity awards. Additional Facts: Assume it is probable at all times that 100 percent of the employees receiving the awards will continue providing service to the Company as employees for the entire five-year explicit service period and that the five-year explicit service period is determined to be the requisite service period. On the grant date, Fashion's management determined that it is probable that the Company's sales in year 5 will be $30 million, and therefore it is probable on the grant date that sales are greater than or equal to at least $25 million. The grant-date fair value of the options assuming a strike price of $15 is $8 per option. The grant-date fair value assuming a strike price of $10 per option is $12 per option. Required: 1. What types of conditions are present in the plan for the vesting of the units? Are they service, performance, market, or "other" conditions?2. How do the service, performance, and market conditions affect vesting of the units? Of the various conditions present in the awards: a. Which affect the vesting of the award? b. Which affect factors other than vesting of the award and what is their accounting treatment? 3. As described above, on January 1, 20X1 (the grant date), $30 million of sales were probable for year 5. During years 1, 2, and 3, $30 million of sales for year 5 remained probable. At the beginning of year 4, management determines that it is probable that only $22 million of sales will occur for year 5. What are the proper accounting treatment and journal entries for each year? 4. Through the end of year 5, Fashion's share price remained at $15 and therefore the market condition was not met. What is the accounting impact of the market condition not having been met?

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Computer Accounting

Authors: Donna Kay

14th Edition

007762453X, 9780077624538

More Books

Students also viewed these Accounting questions

Question

Go, do not wait until I come

Answered: 1 week ago

Question

Make eye contact when talking and listening

Answered: 1 week ago