Problem 16-40 (LO 16-2) (Algo) Assume that on January 1, year 1, ABC Incorporated issued 5,500 stock options with an estimated value of $13 per option. Each option entitles the owner to purchase one share of ABC stock for $26 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 5,500 stock options were exercised in year 3 when the ABC stock was valued at $33 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 (temporary differences) b. Nonqualified Stock Options (permanent differences) Year 1 Book-Tax Favorable/ differences Unfavorable $ Unfavorable Unfavorable O N/A Temporary/ Book-Tax Permanent differences Permanent Temporary N/A $ Year 2 Favorable/ Unfavorable Unfavorable Unfavorable ON/A Temporary/ Permanent Permanent Temporary N/A Book-Tax differences $ Year 3 Favorable/ Unfavorable 0 N/A Unfavorable Favorable Temporary/ Permanent N/A Permanent Temporary
Problem 16-40 (LO 16-2) (Algo) Assume that on January 1, year 1, ABC Incorporated issued 5,500 stock options with an estimated value of $13 per option. Each option entitles the owner to purchase one share of ABC stock for $26 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 5,500 stock options were exercised in year 3 when the ABC stock was valued at $33 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 (temporary differences) b. Nonqualified Stock Options (permanent differences) Year 1 Book-Tax Favorable/ differences Unfavorable $ Unfavorable Unfavorable O N/A Temporary/ Book-Tax Permanent differences Permanent Temporary N/A $ Year 2 Favorable/ Unfavorable Unfavorable Unfavorable ON/A Temporary/ Permanent Permanent Temporary N/A Book-Tax differences $ Year 3 Favorable/ Unfavorable 0 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:Problem 16-40 (LO 16-2) (Algo)
Assume that on January 1, year 1, ABC Incorporated issued 5,500 stock options with an estimated value of $13 per option. Each option
entitles the owner to purchase one share of ABC stock for $26 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 5,500 stock options were exercised in year
3 when the ABC stock was valued at $33 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
(temporary differences)
b. Nonqualified Stock Options
(permanent differences)
Book-Tax
differences
$
Year 1
Favorable/
Unfavorable
Unfavorable
Unfavorable
O N/A
Temporary/
Permanent
Permanent
Temporary
N/A
Book-Tax
differences
$
Year 2
Favorable/
Unfavorable
Unfavorable
Unfavorable
0 N/A
Temporary/
Permanent
Permanent
Temporary
N/A
Book-Tax
differences
$
Year 3
Favorable/
Unfavorable
O N/A
Unfavorable
Favorable
Temporary/
Permanent
N/A
Permanent
Temporary
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