Question

A. On 1/1/Y1, the firm issued 10,000 nonqualified stock options to employees. The shares are currently trading for $10 per share. The option exercise price is set equal to $10 and the fair value of each option is $3. The vesting service period for the stock options is 18 months. The firm receives a deduction equal to the employee’s gain on the exercise of the option when the option is exercised. At the end of year 2 employees exercised 7,000 options. The fair value of the firm’s stock on this date is $19 per share. B. On 1/1/Y1 the firm purchased 1,000 shares of D Corp. for $30 per share. The shares are classified as minority passive investments. Gains/Losses are taxable/deductible when the shares are sold. C. On 1/1/Y1 the firm paid a $90,000 premium for a 3-year insurance policy that expires 12/31/Y3. The insurance premiums are deductible when paid. D. During Y2, the firm accrued charges of $32,000 that will be deductible when paid in Y3. E. Use a domestic (US) tax rate of 20% and a foreign tax rate of 12%. Assume all book/tax Differences relate to domestic taxable income. F. Round all dollar amounts to the nearest dollar.

Answer 1

Answer:Answer is given below:

Particular                                     Year 1          Year 2

Pre tax accounting Income                                9,00,000     12,00,000

Income under Income tax Act                        9,46,666     11,53,334

Taxable Income as per Income tax Act         9,46,666      11,53,334

Tax as per Income tax Act (B)                        2,84,000.00 3,46,001.00

Expenses to be recognised per share                  7                9

Expenses to be recognised in current year     46,666.00      43,334.00

Explanation: