Question

8. Assume that on January 1, year 1, XYZ Corp. issued 1,000 nonqualified stock options with an estimated value of $4.40 per option. Each option entitles the owner to purchase one share of XYZ stock for $14 a share (the per share price of XYZ stock on January 1, year 1 when the options were granted). The options vest 25 percent a year (on December 31) for four years (beginning with year 1). All 500 stock options that had vested to that point were exercised in year 3 when the XYZ stock was valued at $19 per share. No other options were exercised in year 3 or year 4. What is the book-tax difference associated with the stock options in Year One? (enter a favorable difference as a positive and an unfavorable difference as a negative)

9. Assume that on January 1, year 1, XYZ Corp. issued 1,000 nonqualified stock options with an estimated value of $4.40 per option. Each option entitles the owner to purchase one share of XYZ stock for $14 a share (the per share price of XYZ stock on January 1, year 1 when the options were granted). The options vest 25 percent a year (on December 31) for four years (beginning with year 1). All 500 stock options that had vested to that point were exercised in year 3 when the XYZ stock was valued at $19 per share. No other options were exercised in year 3 or year 4. What is the book-tax difference associated with the stock options in Year Three? (enter a favorable difference as a positive and an unfavorable difference as a negative)

Answer 1

Answer 8 :

In Year 1, for book purpose tax deduction :

= Price per option * No. Of option / No. Of vesting year

= 4 * 1000 / 4 ==> 1000

For tax purpose deduction = 0

So, book-tax difference = 1000 unfavorable tax difference

Answer 9 :

In Year 3, for book purpose tax deduction :

Same as Year 1 (i.e. 1000)

For tax purpose deduction in Year 3 :

= Stock option vested in year 3 * (Value of stock - Purchase Price in option)

= 500 * (19-14) ==> 2500

So, book-tax difference = 1500 favorable tax difference