R1-4 Flashcards
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 12?
a.
$150
b.
$20,000
c.
$0
d.
$30,000
Choice “c” is correct. Due to the fact that this is a qualified stock option, there is no recognition of income in the year of grant.
Choice “d” is incorrect. This is the purchase price of the stock upon exercise of 200 shares at $150 per share. It is not income in the year of grant as per the above explanation.
Choice “a” is incorrect. This is simply the option price per share on the date of grant.
Choice “b” is incorrect. 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 is not recognized until the sale occurs in Year 15.
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?
a.
$20,000
b.
$0
c.
$30,000
d.
$150
Choice “a” is correct. 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 is not recognized until the sale occurs in Year 15.
Choice “c” is incorrect. This is simply the purchase price of the stock upon exercise of 200 shares at $150 per share.
Choice “d” is incorrect. This is simply the option price per share on the date of grant.
Choice “b” is incorrect. The realized gain on the sale must be recognized in the year of the sale per the above explanation.
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?
a.
$400 capital gain
b.
$400 ordinary income
c.
$5,000 ordinary income
d.
$5,000 capital gain
Choice “b” is correct. 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.
Choice “a” is incorrect. This is the correct amount, but it is ordinary income and not a capital gain.
Choices “c” and “d” are incorrect per the above explanation.
Which of the following statements is not correct?
a.
For an Incentive Stock Option, once exercised, the stock must be held at least two years after the grant date and at least one year after the exercise date.
b.
Employee Stock Purchase Plans are a type of qualified stock option plan.
c.
The employer may recognize a deductible expense for a nonqualified stock option in the same year that the employee will recognize ordinary income.
d.
The recipient of an Incentive Stock Option will generally have to report compensation income in the year that the option is received.
Choice “d” is correct. Generally there is no recognition of compensation expense with an Incentive Stock Option.
Choices “b”, “c”, and “a” are incorrect as these are all true statements.
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.
a.
II only.
b.
Both.
c.
I only.
d.
Neither.
Explanation
Choice “a” is correct. I is not correct because the rule states 85%, not 95%. II is a correct statement. This is a requirement of an ESPP.
Choices “c”, “b”, and “d” are incorrect per the above explanation.
