Question

On July 1, 2017, Amos Corporation granted nontransferable, nonqualified stock options to certain key employees as additional compensation. The options permit the purchase of 20,000 shares of Amos’s $1 par common stock at a price of $32 per share. On the grant date, the stock’s market value was $32 per share. The options were exercisable beginning July 1, 2021, and expire on July 1, 2025. On February 3, 2023, when the stock was selling for $53 per share, all options were exercised. Amos's tax rate is 35%. Amos has a December 31 year end for financial reporting purposes.
Required:
1. How much compensation expense should Amos record in 2017 and 2018 if the options are worth $15 per share on the grant date?
2. Compute the tax benefit that Amos will receive in 2023 when the employees exercise the options.

Answer 1

Answer:

1. Total compensation expenses = 20,000 * $15 = $300,000

Vesting period (From 2017-2021) = 4 years

Annual compensation expenses = Total compensation expenses / 4

Annual compensation expenses = $300,000 / 4 years

Annual compensation expenses = $75,000

a. Compensation expenses 2017 = $75,000/2

Compensation expenses 2017 = $37,500

b. Compensation expenses 2018 = $75,000

2. The spread between the grant price and exercise price is allowed as base of tax benefit.

Tax benefit = [20,000 * (53-32)] * 35%

Tax benefit = [20,000 * 21] * 35%

Tax benefit = $420,000 * 35%

Tax benefit = $147,000

Answer 2

Amos incurred a compensation expense of $37,500 in 2017 and $75,000 in 2018. Amos will gain $147,000 in tax benefits in 2023.

How do you compute compensation expense and tax benefit?

1.

$\text{Total compensation expenses} = 20,000 \text{ x } 15 = 300,000\\\\\text{Vesting period (From 2017-2021)} = 4 \text{years}\\\\\text{Annual compensation expenses} = \text{Total compensation expenses} / 4\\\\\text{Annual compensation expenses} = 300,000 / 4 \text{years}\\\\\text{Annual compensation expenses} = 75,000\\\\\text{a. Compensation expenses} 2017 = 75,000/2\\\\\text{Compensation expenses} 2017 = 37,500\\\\\text{b. Compensation expenses} 2018 = 75,000$

2.

The difference between the grant price and the exercise price can be used as the basis for calculating the tax advantage.

$\text{Tax benefit} = [20,000 \text{ x } (53-32)] \text{ x } 35%\text{Tax benefit} = [20,000 \text{ x } 21] \text{ x } 35%\text{Tax benefit} = 420,000 \text{ x } 0.35\text{Tax benefit} = 147,000$

For more information about financial reporting, refer below

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