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SU25-BL-BUS-A329-2695 Quiz 15

Single choice

In January Year 1, Khors Company issued nonqualified stock options to its CEO, Jenny. Because the company did not expect Jenny to leave the company, the options vested at the time they were granted with a total value of $51,000. In December of Year 2, the company experienced a surge in its stock price, and Jenny exercised the options. The total bargain element at the time of exercise was $62,000. For Year 2, what is the book–tax difference due to the options exercised?

Options
A.$11,000 unfavorable
B.$11,000 favorable
C.$51,000 unfavorable
D.$62,000 favorable
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Step-by-Step Analysis
To tackle this, first identify what is recognized for book purposes and what is deductible for tax purposes regarding nonqualified stock options (NSOs). Option 1: "$11,000 unfavorable". This would imply a negative book-to-tax difference in Year 2. Since the grant vested immediately, the company would have recognized the entire $51,000 as book compensation expense in Year 1, not in Year 2. In Year 2, there is no additional book expense related to these options. Meanwhile, the tax dedu......Login to view full explanation

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