Question

Assume that on January 1, year 1, XYZ Corp. issued 1,000 nonqualified stock options with an estimated value of $4.20 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 $21 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?

Answer 1

The book tax difference associated with the stock options in Year three assuming the company applies ASC 718.

Book tax difference = ( 21- 14) * 500 = 3500

For tax purposes, XYZ will deduct $3000 in year 3 when the stock options of 500 are exercised.

For book purposes ,the company will deduct 1050 [( 1000 *4.2 ) / 4] for each year i.e. 1,2,3 and 4th year.