Assume that on January 1, year 1, ABC Inc. issued 7,250 stock options with an estimated value of $13 per option. Each option entitles the owner to purchase one share of ABC stock for $25 a share (the per share price of ABC stock on January 1, year 1, when the options were granted). The options vest at the end of the day on December 31, year 2. All 7,250 stock options were exercised in year 3 when the ABC stock was valued at $34 per share. Identify ABC's year 1, 2, and 3 tax deductions and book-tax differences (indicate as favorable or unfavorable and as permanent or temporary) associated with the stock options under the following alternative scenarios: Required: a. The stock options are incentive stock options. b. The stock options are nonqualified stock options. Complete the following table. (For all requirements, leave no answer blank. Enter zero if applicable and select "N/A" if no effect.) Under ASC 718 a. Incentive Stock Options b. Nonqualified Stock Options Book-Tax Diff Year 1 Favorable/ Unfavorable Temporary/ Permanent Unfavorable Permanent Unfavorable Temporary Book-Tax Diff Year 2 Favorable/ Unfavorable Unfavorable Unfavorable Temporary/ Permanent Permanent Temporary Book-Tax Diff Year 3 Favorable/ Unfavorable N/A Unfavorable Favorable Temporary/ Permanent N/A Permanent Temporary
Assume that on January 1, year 1, ABC Inc. issued 7,250 stock options with an estimated value of $13 per option. Each option entitles the owner to purchase one share of ABC stock for $25 a share (the per share price of ABC stock on January 1, year 1, when the options were granted). The options vest at the end of the day on December 31, year 2. All 7,250 stock options were exercised in year 3 when the ABC stock was valued at $34 per share. Identify ABC's year 1, 2, and 3 tax deductions and book-tax differences (indicate as favorable or unfavorable and as permanent or temporary) associated with the stock options under the following alternative scenarios: Required: a. The stock options are incentive stock options. b. The stock options are nonqualified stock options. Complete the following table. (For all requirements, leave no answer blank. Enter zero if applicable and select "N/A" if no effect.) Under ASC 718 a. Incentive Stock Options b. Nonqualified Stock Options Book-Tax Diff Year 1 Favorable/ Unfavorable Temporary/ Permanent Unfavorable Permanent Unfavorable Temporary Book-Tax Diff Year 2 Favorable/ Unfavorable Unfavorable Unfavorable Temporary/ Permanent Permanent Temporary Book-Tax Diff Year 3 Favorable/ Unfavorable N/A Unfavorable Favorable Temporary/ Permanent N/A Permanent Temporary
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:Assume that on January 1, year 1, ABC Inc. issued 7,250 stock options with an estimated value of $13 per option. Each option entitles
the owner to purchase one share of ABC stock for $25 a share (the per share price of ABC stock on January 1, year 1, when the
options were granted). The options vest at the end of the day on December 31, year 2. All 7,250 stock options were exercised in year 3
when the ABC stock was valued at $34 per share. Identify ABC's year 1, 2, and 3 tax deductions and book-tax differences (indicate as
favorable or unfavorable and as permanent or temporary) associated with the stock options under the following alternative scenarios:
Required:
a. The stock options are incentive stock options.
b. The stock options are nonqualified stock options.
Complete the following table. (For all requirements, leave no answer blank. Enter zero if applicable and select "N/A" if no effect.)
Under ASC 718
Incentive Stock Options
b. Nonqualified Stock Options
a.
Book-Tax
Diff
Year 1
Favorable/
Unfavorable
Temporary/
Permanent
Unfavorable Permanent
Unfavorable Temporary
IMG_2910.heic
Book-Tax
Diff
Year 2
Favorable/
Unfavorable
Unfavorable
Unfavorable
Temporary/ Book-Tax
Permanent
Diff
Permanent
Temporary
Year 3
Favorable/
Unfavorable
N/A
Unfavorable
Favorable
Temporary/
Permanent
N/A
Permanent
Temporary
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