Question 51. (LO 2) Assume that on January 1, year 1, ABC, Inc. issued 5,000

51. (LO 2) Assume that on January 1, year 1, ABC, Inc. issued 5,000 stock options with an estimated value of $10 per option. Each option entitles the owner to purchase one share of ABC stock for $25 a share (the per share price of ABC stock on January 1, year 1 when the options were granted). The options vest 50 percent at the end of the day on December 31, year 1, and 50 percent at the end of the day on December 31, year 2. All 5,000 stock options were exercised in year 3 when the ABC stock was valued at $31 per share. Identify ABC’s year 1, 2, and 3 tax deductions and book-tax differences (indicate whether permanent and/or temporary) associated with the stock options under the following alternative scenarios:

a. The stock options are incentive stock options and ASC 718 (the codification of FAS 123R) does not apply to the options.

b. The stock options are nonqualified stock options and ASC 718 does not apply to the options.

c. The stock options are incentive stock options and ASC 718 applies to the options.

d. The stock options are nonqualified stock options and ASC 718 applies to the options.

52. (LO 2) Assume that on January 1, year 1, XYZ Corp. issued 1,000 nonqualified stock options with an estimated value of $4 per option. Each option entitles the owner to purchase one share of XYZ stock for $14 a share (the per share price of XYZ stock on January 1, year 1 when the options were granted). The options vest 25 percent a year (on December 31) for four years (beginning with year 1). All 500 stock options that had vested to that point were exercised in year 3 when the XYZ stock was valued at $20 per share. No other options were exercised in year 3 or year 4. Identify XYZ’s year 1, 2, 3, and 4 tax deductions and book-tax difference (identify as permanent and/or temporary) associated with the stock options under the following alternative scenarios:

a. ASC 718 does not apply to the stock options.

b. ASC 718 applies to the stock options.

53. (LO2) What book-tax differences in year 1 and year 2 associated with its capital gains and losses would ABD Inc. report in the following alternative scenarios? Identify each book-tax difference as favorable or unfavorable and as permanent or temporary.

a.

Year 1 Year 2

Capital gains $20,000 $5,000

Capital losses 8,000 0

b.

Year 1 Year 2

Capital gains $ 8,000 $5,000

Capital losses 20,000 0

c.

Year 1 Year 2

Capital gains $ 0 $50,000

Capital losses 25,000 30,000

d.

Year 1 Year 2

Capital gains $ 0 $40,000

Capital losses 25,000 0

e. Answer for year 6 only.

Year 1 Years 2-5 Year 6

Capital gains $ 0 $ 0 $15,000

Capital losses 10,000 0 0

54. (LO 2) What book-tax differences in year 1 and year 2 associated with its capital gains and losses would DEF Inc. report in the following alternative scenarios? Identify each book-tax difference as favorable or unfavorable and as permanent or temporary.

a. In year 1, DEF recognized a loss of $15,000 on land that it had held for investment. In year 1, it also recognized a $30,000 gain on equipment it had purchased a few years ago. The equipment sold for $50,000 and had an adjusted basis of $20,000. DEF had deducted $40,000 of depreciation on the equipment. In year 2, DEF recognized a capital loss of $2,000.

b. In year 1, DEF recognized a loss of $15,000 on land that it had held for investment. It also recognized a $20,000 gain on equipment it had purchased a few years ago. The equipment sold for $50,000 and had an adjusted basis of $30,000. DEF had deducted $15,000 of tax depreciation on the equipment.

55. (LO 2) MWC Corp. is currently in the sixth year of its existence (2014). In 2009– 2013, it reported the following income and (losses) (before net operating loss carryovers or carrybacks).

2009: ($ 70,000)

2010: ($ 30,000)

2011: $ 60,000

2012: $140,000

2013: ($ 25,000)

2014: $300,000

Assuming the original facts and that MWC elects to not carry back NOLs, what was MWC’s year 2012 taxable income?

If MWC does not elect to forgo any NOL carrybacks, what is its 2014 taxable income after the NOL deduction?

If MWC always elects to forgo NOL carrybacks, what is its 2014 taxable income after the NOL deduction? What is its 2014 book-tax difference associated with its NOL? Is it favorable or unfavorable? Is it permanent or temporary?

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