In 2016 Martinez Corporation granted nonqualified stock options to Shawn to buy 1,000 shares of Martinez stock at $15 per share exercisable for six years.At the date of grant, the stock was selling for $10 per share.In 2018 Shawn exercises the options when the market price is $40 per share.In 2019, Shawn sells the 1,000 shares of stock for $42 per share.How much is the deduction that Martinez Corporation is allowed and in which year?

Question

Quizplus · Accepted Answer

Martinez Corporation is allowed a deduction in the year Shawn exercises the options, which is 2018. The deduction amount is the difference between the market price at the time of exercise ($40) and the exercise price ($15), multiplied by the number of shares (1,000). This calculation results in a $25,000 deduction.

In 2016 Martinez Corporation Granted Nonqualified Stock Options to Shawn