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
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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:
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 718
a. Incentive Stock Options
b. Nonqualified Stock Options
(temporary differences)
b. Nonqualified Stock Options
(permanent differences)
Book-Tax
differences
Year 1
Favorable or
Unfavorable
Temporary or
Permanent
Book-Tax
differences
Year 2
Favorable or
Unfavorable
Temporary or
Permanent
Book-Tax
differences
Year 3
Favorable or
Unfavorable
Temporary or
Permanent
Transcribed Image Text: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: 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 718 a. Incentive Stock Options b. Nonqualified Stock Options (temporary differences) b. Nonqualified Stock Options (permanent differences) Book-Tax differences Year 1 Favorable or Unfavorable Temporary or Permanent Book-Tax differences Year 2 Favorable or Unfavorable Temporary or Permanent Book-Tax differences Year 3 Favorable or Unfavorable Temporary or Permanent
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