D1. Assume that on January 1, year 1, ABC Incorporated issued 5,000 stock options with an estimated value of $10 per option. Each optionentitles 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 theoptions were granted). The options vest at the end of the day on December 31, year 2. All 5,000 stock options were exercised in year3 when the ABC stock was valued at $31 per share. Identify ABC's year 1, 2, and 3 tax deductions and book-tax differences (Indicateas favorable or unfavorable and as permanent or temporary) associated with the stock options under the following alternativescenarios:Required:a. The stock options are incentive stock options.b. The stock options are nonqualified stock options.Complete the following table.Note: For all requirements, leave no answer blank. Enter zero if applicable and select "Not Applicable" if no effect.Under ASC 718a. Incentive Stock Optionsb. Nonqualified Stock Options(temporary differences)b. Nonqualified Stock Options(permanent differences)Book-Taxdifferences$Is$Year 1Favorable orUnfavorableTemporary orPermanent0X Not Applicable X0X Not Applicable X0 Not Applicable ✔ TemporaryXTemporaryXBook-TaxdifferencesxsTemporary ✓$STX Answer is not complete.Year 2Favorable orUnfavorableTemporary orPermanent0X Not Applicable TemporaryTemporary0X Not Applicable0✔ Not ApplicableTemporaryX✓Book-TaxdifferencesYear 3Favorable orUnfavorableTemporary orPermanentPermanentPermanentPermanentX✔X

Stock Options: A stock option gives an investor the right, but not the obligation, to buy or sell a…

Assume that on January 1, year 1, ABC Incorporated issued 5,000 stock options with an estimated value of $10 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 5,000 stock options were exercised in year 3 when the ABC stock was valued at $31 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:

Assume that on January 1, year 1, ABC Incorporated issued 5,000 stock options with an estimated value of $10 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 5,000 stock options were exercised in year 3 when the ABC stock was valued at $31 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:

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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