M4 Employee Stock Options

Question 1

MCQ-07356
Wade Inc. granted a nonqualified stock option for 100 shares at $50 per share to Mary, an employee, on May 1, Year 12. On that date, the option was selling on an established market for $4 per share. Mary exercised the option on August 2, Year 13, when the FMV was $80 per share. She sold the stock on September 2, Year 14, for $100 per share. How much gross income and what type did Mary recognize in Year 12?

Answer 1

$400 ordinary income

The employee receiving a nonqualified stock option must recognize as ordinary income the value of the option if traded on an established market. Here, that is 100 shares at $4 per
share, or $400.

Question 2

MCQ-08655
Logan, an employee of Argon Industries, earned a salary of $60,000 in Year 2. In addition, the following two transactions between Logan and Argon occurred in Year 2: Logan received a bonus of 100 shares of publicly traded stock worth $13,000 with a basis to Argon of $8,000, and Logan purchased 1,000 shares of unrestricted Argon stock pursuant to a nonqualifying stock option plan for $10 per share when stock was valued at $25 per share. What amount of compensation should Argon report in Logan’s Form W-2 for Year 2?

Answer 2

$88,000

The salary of $60,000 is included in the Form W-2. The FMV of the bonus of $13,000 is included in the Form W-2. Because the stock option was nonqualifying, the bargain element is included in Form W-2 as well. The stock is worth $25 per share and the option price is $10 per share. That is a bargain element on nonqualified stock options of $15 per share on 1,000 shares. That is $15,000. $60,000 + $13,000 + $15,000 = $88,000.

Question 3

MCQ-07357
Which of the following statements is not correct?

Answer 3

The recipient of an incentive stock option will generally have to report compensation income in the year that the option is received.

Generally there is no recognition of compensation expense with an incentive stock option.

Question 4

MCQ-07355
Robert Corp. granted an incentive stock option for 200 shares to Beverly, an employee, on March 14, Year 12. The option price and FMV on the date of grant was $150. Beverly exercised the option on August 2, Year 14, when the FMV was $180 per share. She sold the stock on September 20, Year
15, for $250 per share. How much gross income did Beverly recognize in Year 15?

Answer 4

$20,000

This is the gain Beverly will recognize upon the sale of the stock. The purchase was 200 shares at $150 per share, or $30,000. The sale was 200 shares at $250 per share, or
$50,000. This gain on incentive stock options is not recognized until the sale occurs in Year 15.

Question 5

MCQ-07358
James Corp. issue stock options to employees under an Employee Stock Purchase Plan. Which of the following statements is correct?

I. The option exercise price may not be less than the lesser of 95% of the FMV of the stock
when granted or exercised.
II. The option cannot be exercised more than 27 months after the grant date.

Answer 5

II only

I is not correct because the rule states 85%, not 95%. II is a correct statement. This is a requirement of an ESPP