Question

The Ageless Child, Inc. (“TAC” or “the Company”) is a public company that sells children’s fashions and educational toys and games. As an incentive to its employees, TAC established a compensation incentive plan in which a total of 100,000 options were granted on January 1, 2019. TAC’s stock price was $15.00 per share on that date. 718-20-55-10 The significant terms of the incentive plan are as follows: • The options have a $15.00 “strike” or exercise price. • 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 TAC must achieve annual sales of at least $20 million during the fifth year (2023) of the explicit service period. o TAC’s share price must increase by at least 25% over the five-year explicit service period. • In addition, if the Company achieves sales of at least $25 million during the fifth year (2023) 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% 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, TAC’s management determine that it is probable that the Company’s sales in 2023 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 in the fifth year. • 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. The CFO, Jayne Wilson, has come to you, the controller, and asked you to gather some information for her. First, she wants the types of conditions (i.e., service, performance, market, or other) present in the plan for the vesting of the units. Second, she wants to know how the service, performance, and market conditions affect vesting of the units. That is, of the various conditions present in the award, which conditions affect the vesting of the award and which affect factors other than vesting of the award (and what is their accounting treatment). Third, she would like to know the accounting impact if TAC’s share price remains steady at $15 through the end of the fifth year. Bonus (5 points) As described above, on January 1, 2019 (the grant date), $30 million of sales were probable for the fifth year (2023). During 2019, 2020, and 2021 $30 million of sales for 2023 remained probable. At the beginning of 2022 (the fourth year), management determines that it is probable that only $22 million of sales will occur for 2023. What are the journal entries for each year? Cite references from the FASB Accounting Standards Codification.

Answer 1