Problem 16-40 (LO 16-2) (Algo)Assume that on January 1, year 1, ABC Incorporated issued 7,650 stock options with an estimated value of $18 per option. Each optionentitles the owner to purchase one share of ABC stock for $27 a share (the per share price of ABC stock on January 1, year 1, when theoptions were granted). The options vest at the end of the day on December 31, year 2. All 7,650 stock options were exercised in year 3when the ABC stock was valued at $33 per share. Identify ABC's year 1, 2, and 3 tax deductions and book-tax differences (indicate asfavorable or unfavorable and as permanent or temporary) associated with the stock options under the following alternative scenarios:Required:a. The stock options are incentive stock options.b. The stock options are nonqualified stock options.Complete the following table. (For all requirements, leave no answer blank. Enter zero if applicable and select "N/A" if no effect.)Year 1Year 2Year 3Book TaxdifferencesFavorableUnfavorableТеmporary!PermanentBook TaxdifferencesFavorablelUnfavorableТemporary/PemanentBook-TaxdifferencesFavorableUnfavorableTemporary/PermanentUnder ASC 718a. Incentive Stock Options2468,850 UnfavorablePermanent68,850 UnfavorablePermanentO NIAN/Ab. Nonqualified Stock Options(temporary differences)b. Nonqualified Stock Options(permanent differences)68,850 UnfavorableTemporary68,850 UnfavorableTemporary137 700$O N/AN/A2$O N/AN/A

Incentive stock options (ISO) refer to the form of corporate benefit which provides the right to an…

re price of ABC end of the day on December 31, year 2. All 7,650 sto are. Identify ABC's year 1, 2, and 3 tax deductions and temporary) associated with the stock options under th ns. tions. nents, leave no answer blank. Enter zero if applicable

re price of ABC end of the day on December 31, year 2. All 7,650 sto are. Identify ABC's year 1, 2, and 3 tax deductions and temporary) associated with the stock options under th ns. tions. nents, leave no answer blank. Enter zero if applicable

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Question

Problem 16-40 (LO 16-2) (Algo)
Assume that on January 1, year 1, ABC Incorporated issued 7,650 stock options with an estimated value of $18 per option. Each option
entitles the owner to purchase one share of ABC stock for $27 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 7,650 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.)
Year 1
Year 2
Year 3
Book Tax
differences
Favorable
Unfavorable
Теmporary!
Permanent
Book Tax
differences
Favorablel
Unfavorable
Тemporary/
Pemanent
Book-Tax
differences
Favorable
Unfavorable
Temporary/
Permanent
Under ASC 718
a. Incentive Stock Options
24
68,850 Unfavorable
Permanent
68,850 Unfavorable
Permanent
O NIA
N/A
b. Nonqualified Stock Options
(temporary differences)
b. Nonqualified Stock Options
(permanent differences)
68,850 Unfavorable
Temporary
68,850 Unfavorable
Temporary
137 700
$
O N/A
N/A
2$
O N/A
N/A

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