McGraw-Hill's Taxation of Individuals and Business Entities 3rd Edition by Brian Spilker, Benjamin Ayers, John Robinson, Edmund Outslay, Ronald Worsham, John Barrick, Connie Weaver

Exercise 21

Assume that on January 1, year 1, ABC, Inc.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 50 percent at the end of the day on December 31, year 1, and 50 percent 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 whether permanent and/or temporary) associated with the stock options under the following alternative scenarios:
a.The stock options are incentive stock options and ASC 718 (the codification of FAS 123R) does not apply to the options.
b.The stock options are nonqualified stock options and ASC 718 does not apply to the options.
c.The stock options are incentive stock options and ASC 718 applies to the options.
d.The stock options are nonqualified stock options and ASC 718 applies to the options.