On December 31, 2018, Khors Company issued nonqualified stock options to its CEO.The options fully vest on December 31, 2019, and the options were valued at $50,000 on the grant date.Ms.Svaro exercised the options on December 31, 2019.The total bargain element at the time of exercise was $40,000.For 2019, what is the nature of the book-tax difference due to the options exercised?

Question

Quizplus · Accepted Answer

The book-tax difference due to the options exercised is unfavorable and permanent because the bargain element of $40,000 represents taxable compensation to the CEO that is not deductible for book purposes. Therefore, the book income will be higher than the taxable income, resulting in a permanent difference.

On December 31, 2018, Khors Company Issued Nonqualified Stock Options