Question

Martin Corporation granted an incentive stock option to employee Caroline on January 1, 2013. The option price was $150, and the FMV of the Martin stock was also $150 on the grant date. The option allowed Caroline to purchase 160 shares of Martin stock. Caroline exercised the option on August 1, 2017, when the stock's FMV was $250. Unless otherwise stated, assume Caroline is a qualifying employee. If Caroline sells the stock on September 5, 2019, for $350 per share, she must recognize (ignore alternative minimum tax) A) 0. No gain or loss is recognized at exercise or sale with incentive stock options. B) long-term capital gain of $16,000 in 2019. C) ordinary income of $16,000 on the exercise date and a long-term capital gain of $16,000 in 2019. D) long-term capital gain of $32,000 in 2019.

Answer 1

Answer is C Option: ordinary income of $16,000 on the exercise date and a long-term capital gain of $16,000 in 2019

Given Information

Option Price = $150/-

FMV of stock = $150/-

No of shares purchased = 160 shares

FMV when the option was exercised on August 1 2017= $250/-

Sale of stock(shares) on September 5 2019 = $350/-

calculation of Ordinary Income

as on date of exercise

option value 160*150=24000

fair value 160*250=40000

therefore, ordinary income will be 40000-24000=16000.

calculation of capital gain

on the date of sell

sell value 160*350=56000

cost 250*160=40000

Long term capital gain will be 16000 as sold after 12months

Please like this Answer, it helps me a lot. Thank You.