Question

Orange inc. Issued 20,000 nonqualified stock options valued at $40,000 (in total). The options vest over two years—half in 2018 (the year of issue) and half in 2019. One thousand options are exercised in 2019 with a bargain element on each option of $6. What is the 2019 book-tax difference associated with the stock options?

Answer 1

Answer: $14,000 (Unfavorable)

Explanation: The book tax difference is the difference between the expenses for the book purpose in 2019 and the price of the option exercised. If the difference is positive it is unfavorable while if the difference is negative it is favorable.

Difference in book tax = The total value of the shares at the year - Amount of bargain element on option exercised.

Difference in book tax = ($40,000 × 1/2) - (1,000 × $6)

Difference in book tax = $20,000 - $6,000

Difference in book tax = $14,000

It is unfavorable because book tax expenses exceed the tax deductions.