In an effort to motivate certain members of its senior management, Xanthos, Inc. ("Xanthos" aka "the Company") granted non-qualified stock options under its 2018 stock incentive plan to certain employees. A total of 10,000 options were granted on December 1, 2018. On that date (the grant date), Xanthos' stock price was $6.00 per share. The significant terms of the incentive plan are as follows:

The options have a $6.00 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:

• 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).
• The Company must achieve annual sales of at least $150 million during the fifth year of the explicit service period.
• 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 $170 million during the fifth year of the explicit vesting period, the strike price of the options will decrease from $6.00 to $4.00.
• 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, management determined that it is probable that the Companys sales in year 5 will be $180 million, and therefore it is probable on the grant date that sales are greater than or equal to at least $170 million. The grant-date fair value of the options assuming a strike price of $6.00 is $3.50 per option. The grant-date fair value assuming a strike price of $4.00 per option is $5.00 per option.

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: Which affect the vesting of the award? Which affect factors other than vesting of the award and what is their accounting treatment?
3. As described above, on December 1, 2018 (the grant date), $180 million of sales were probable for year 5. During years 1, 2, and 3, $180 million of sales for year 5 remained probable. At the beginning of year 4, management determines that it is probable that only $165 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, the share price remained at an average of $7.00 and therefore the required 25% increase in share price did not happen. What is the accounting impact of not meeting this requirement?
5. Determine the how the stock option grant and vesting affects the company's taxes on income statement and balance sheet during the vesting period.