Question

Burke, Inc. granted 1,000 nonqualified employee stock options with an estimated value of 2 per option. Each option entitled the owner to purchase 1 share at a price of10 per share (the price of the stock at grant date). The options vested immediately but none were exercised in the current year. What is the current year book-tax difference?

1) $0 difference; book and tax treatment is the same
2) $2,000 temporary and favorable difference
3) $2,000 temporary and unfavorable difference

Answer 1

The current year book-tax difference for the stock options granted by Burke, Inc. is a $2,000 temporary and favorable difference, as the book expense has been recorded but the tax deduction will not occur until the options are exercised.

Step-by-step explanation:

The student wants to know the current year book-tax difference for the granted nonqualified employee stock options by Burke, Inc. Since the given options have an estimated value of $2 each, and 1,000 were granted, the total compensation expense for book purposes would be 1,000 options times $2, equaling $2,000.

However, for tax purposes, no deduction is allowed until the options are exercised, which did not happen in the current year. Thus, there is a $2,000 temporary and favorable difference because for tax purposes, the company has not yet incurred an expense (since the options were not exercised), but for book purposes, they have already recorded the expense.