In 2012, Sanford Corp. adopted a plan to give additional incentive compensation to its dealers to sell its main product: fire extinguishers. Under the plan, Sanford transferred 9,000 of its common shares to a trust with the provision that Sanford would have to forfeit interest in the trust and no part of the trust fund could ever revert to Sanford. Shares were to be distributed to dealers based on each dealer's portion of the total number of fire extinguishers purchased from Sanford (above certain minimum levels per dealer) over the three-year period ending June 30, 2015.
In 2012, the shares of Sanford Corp. were closely held although they did trade on the national stock market. The shares' book value was $7.90 per share as of June 30, 2012, and in 2012 additional shares were sold to existing shareholders for $10 per share.
In 2012, when the shares were transferred to the trust, Sanford charged Deferred Costs for $90,000 ($10 per share market value) and credited Common Shares for the same amount. The deferred cost was charged to operations over a three-year period ended June 30, 2015.
In July 2015, all shares in the trust were distributed to the dealers. The shares' market value at the date of distribution from the trust had risen to $110 per share.
Instructions
Adopt the role of a financial analyst and discuss the financial reporting issues.