Fashion Inc. (Fashion or the Company), an SEC registrant, is a fashion retailer that sells mens and womens 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), Fashions 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 Companys 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, Fashions management determined that it is probable that the Companys 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

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?