Question

Need questions 1-4 answered.

Glam Time, Inc. ("Glam Time” 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 granting 100,000 options on January 15, 20X0. On that date (the grant date), GlamTime'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: . 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 $20 million during the fifth year of the explicit service period. . 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 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 that 100 percent of the employees receiving the awards will continue as employees for the entire five-year service period and that the five-year service period is determined to be the requisite service period. . On the grant date, GlamTime'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.

Answer 1

1	Different type of conditions are present in the options are as follows
	Conditions
1	5 years service			Performance
2	$20 million sales in 5th year			Other conditions
3	Increase in share price by 25%			Market
2	If any conditions out of the conditions mentioned above would not be fulfilled
	then the vesting of the options would not be possible
	Let us understand through an example
	If an employee has joined an organisation where these conditions applicable
a.	If he left that organisation before 5 years of the completion of the services
b.	If the organisation would not be able to achieve the sales as mentioned in the conditions
c.	If the share price will not be able to increase by the 25%
	In any case, the employee would not be able to vest the options
3	It has been given in the question that the strike price would be $15 if the sales would be less than 25$ million
	otherwise $10
	For the first three years, there is a high probability that the sales would be more than $30 million
	Total Cost for the options			100,000	*	(25-10)	1,500,000
	yearly Cost of the options in the Income statement						300000
Date	Particulars					Amount (DR)	Amount (CR)
First-year	ESOP Expenditure account					300000
	To ESOP outstanding						300000
Second-year	ESOP Expenditure account					300000
	To ESOP outstanding						300000
Third-year	ESOP Expenditure account					300000
	To ESOP outstanding						300000
	In the fourth there is a change in the estimation of the sales and the same has been reduced
	to less than $25 million
	Change in the estimation
	Total Cost for the options			100,000	*	(25-15)	1,000,000
	yearly Cost of the options						200000
	Total amount of the cost should be recognized						800000
Fourth-year	ESOP outstanding					100000
	To ESOP Expenditure account						100000
Fifth-year	ESOP Expenditure account					200000
	To ESOP outstanding						200000
4	If the conditions have not met the options will not be vested
	All the amount which has been in the outstanding will have to be reversed
	we have two options we can reverse the same show in the other income in the income statement
	or can show as a reduction in the employee benefit expenses
Reversal of the esop	ESOP outstanding					1000000
	To Other income (or Employee benefit expenses)						1000000