Question

j. Each year, Xilinx receives a tax benefit related to exercises of employee stock options. This benefit arises because firms may deduct as an expense for tax purposes the intrinsic value of options at the time the options are exercised by employees. Using information in the statement of cash flows, determine the amount of tax benefit Xilinx received during fiscal 2013. i. Il. Why does this amount appear as a reconciling item in the operating section of the Ill, statement of cash flows? what does the amount of "Excess tax benefit" that is reclassified from the operating to the financing section of the statement of cash flows capture? Hint: see the discussion of "excess tax benefits" in the first paragraph of Note 2. Prepare the journal entry to record Xilinx's 2013 tax benefit from employee exercises of stock options. Compute your own estimate of the 2013 tax benefit to validate the amount reported by Xilinx. To do this, first estimate the intrinsic value of options exercised during the year and then apply the appropriate tax rate. Recall that an option's intrinsic value is the difference between its exercise price and the fair-value of the stock. Assume that the weighted average exercise price of options granted in 2013 provides a good measure of the fair-value of Xilinx stock when options were exercised during the year. Further assume that 35% is an appropriate marginal tax rate for Xilinx. v. V.

Answer 1

1) Tax benefit from ESO = $8984

2)

A firm with positive taxable income takes a deduction for the intrinsic value of any options exercised during the year (ESO deduction). Because this stock option amount is not an expense under SFAS 123, book income exceeds taxable income. the adjustment to correct for the overstatement of current tax expense under APB 25 subtracts the tax benefit of stock options reported in the Statement of Shareholders’ Equity from reported current tax expense

3)The vesting of stock-based compensation represents a noncash expense that reduces book income, which isn’t recognized by the IRS as a deductible expense. Since it’s a noncash expense, operating cash flow will be increased relative to income. When stock options are exercised, the cash expenditure to provide employees with stock is classified as a financing activity on the statement of cash flows. Book income is unaffected, and the reversal of the deferred tax is captured as an operating component within the statement of cash flows.

But to understand the real financial performance from operations the entire employment compensation amount should be classified in operating activities instead of Financing activities

4)

Current tax	88069
Shareholders equity		8984
To cash		79085

5) Intrinsic value = $77862

Tax @35% = 27252

Tax benefit given = $8984