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

:

Based on the US GAAP, answer the following questions:

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?