In 2013, Hu Corporation granted incentive stock options to Trevor to buy 5,000 shares of Hu stock at $20 per share exercisable for six years. At the date of grant, the stock was selling for $19 per share. In 2016, Trevor exercises the options when the market price was $38 per share. Trevor sells the stock in 2018 for $42 per share. How much income or gain does Trevor recognize and in which year?
A) $110,000 capital gain in 2018 only
B) $95,000 income in 2013 only
C) $90,000 income in 2016 and $20,000 capital gain in 2018
D) $90,000 income in 2016 only

Question

Quizplus · Accepted Answer

In 2018, Trevor recognizes a capital gain of $110,000, calculated as (5,000 shares * ($42 sale price - $20 exercise price)). There is no income recognized in 2013 or 2016 because incentive stock options do not trigger income upon grant or exercise if certain conditions are met.

In 2013, Hu Corporation Granted Incentive Stock Options to Trevor