The Johnson Co. grants options on 5,000 shares of its common stock. The fair mar
ID: 2487927 • Letter: T
Question
The Johnson Co. grants options on 5,000 shares of its common stock. The fair market value of each option on the grant date is $3 per share. The exercise price is $2. The tax rate (all years) is 20%. The options were exercise at the end of the current year. At the beginning of the current year Paid-in capital tax effect of stock options had a credit balance of $10,000. 1. What is the ending balance of Paid-in capital tax effect of stock options if the fair market value of the stock on the exercise date was $3 per share? 2. What is the balance of Paid-in capital tax effect of stock options at the end of the current year if the fair market value of Johnson's stock on the exercise date was $11 per share? 3. What is the ending Paid-in capital tax effect of stock options, if the market price of the stock on the exercise date is $5.
Explanation / Answer
no of shares 5000 FMV on grant date 3 per share exercise price 2 per share current year Paid-in capital tax effect of stock options credit balance $10,000 calculation of ending balance of Paid-in capital tax effect of stock options 1. if the fair market value of the stock on the exercise date was $3 per share as FMV on the exercise date is same i.e. $3 per share so there is no increase in tax effect 2. if the fair market value of Johnson's stock on the exercise date was $11 per share as FMV is higher than the exercise price so tax would be on $11-$3= $9 $9*5000 =$45000 we will reduce current year Paid-in capital tax effect of stock options credit balance $10000 so balance taxable is $35000 3. if the market price of the stock on the exercise date is $5. as FMV is higher than the exercise price so tax would be on $5-$3= $2 $2*5000 =$10000 we will reduce current year Paid-in capital tax effect of stock options credit balance $10000 so balance taxable is zero
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