Problem 16-40 (LO 16-2) (Algo) Assume that on January 1, year 1, ABC Inc. issued 8,350 stock options with an estimated value of $18 per option. Each option entitles the owner to purchase one share of ABC stock for $33 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 8,350 stock options were exercised in year 3 when the ABC stock was valued at $40 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.) a. b. Under ASC 718 Incentive Stock Options Nonqualified Stock Options Book- Tax Diff $58,450 $58,450 Year 1 Favorable/ Unfavorable Unfavorable Unfavorable Temporary/ Permanent Book- Tax Diff Answer is not complete. Year 2 Favorable/ Unfavorable Permanent ✔ $ 58,450 X Unfavorable Temporary ✔ $ 58,450 X Unfavorable Temporary/ Permanent Permanent ✔Temporary Book- Tax Diff Year 3 Favorable/ Unfavorable ✔S 0 $ 116,900 $58,450 X Unfavorable Favorable Temporary/ Permanent ✔Temporary ✔Permanent
Problem 16-40 (LO 16-2) (Algo) Assume that on January 1, year 1, ABC Inc. issued 8,350 stock options with an estimated value of $18 per option. Each option entitles the owner to purchase one share of ABC stock for $33 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 8,350 stock options were exercised in year 3 when the ABC stock was valued at $40 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.) a. b. Under ASC 718 Incentive Stock Options Nonqualified Stock Options Book- Tax Diff $58,450 $58,450 Year 1 Favorable/ Unfavorable Unfavorable Unfavorable Temporary/ Permanent Book- Tax Diff Answer is not complete. Year 2 Favorable/ Unfavorable Permanent ✔ $ 58,450 X Unfavorable Temporary ✔ $ 58,450 X Unfavorable Temporary/ Permanent Permanent ✔Temporary Book- Tax Diff Year 3 Favorable/ Unfavorable ✔S 0 $ 116,900 $58,450 X Unfavorable Favorable Temporary/ Permanent ✔Temporary ✔Permanent
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:Problem 16-40 (LO 16-2) (Algo)
Assume that on January 1, year 1, ABC Inc. issued 8,350 stock options with an estimated value of $18 per option. Each option entitles
the owner to purchase one share of ABC stock for $33 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 8,350 stock options were exercised in year 3 when
the ABC stock was valued at $40 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.)
a.
b.
Under ASC 718
Incentive Stock Options
Nonqualified Stock
Options
Book-
Tax
Diff
$58,450
$58,450
Year 1
Favorable/
Unfavorable
Unfavorable
Unfavorable
Temporary/
Permanent
Book-
Tax Diff
Answer is not complete.
Year 2
Favorable/
Unfavorable
Permanent ✔ $ 58,450 X Unfavorable
Temporary
✔ $ 58,450 X Unfavorable
Temporary/
Permanent
Permanent
✔Temporary
Book-
Tax Diff
Year 3
Favorable/
Unfavorable
✓ S 0
$
116,900
$58,450 X Unfavorable
Favorable
Temporary/
Permanent
✔Temporary
✔Permanent
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