This year, Nilo Inc. granted nonqualified stock options to 230 employees. For financial statement purposes, Nike recorded a $179,200 expense for the estimated value of the options. As a result of this transaction, Nike has a:

Question

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The grant of nonqualified stock options creates a temporary unfavorable book/tax difference because the expense recorded on the financial statements is not deductible for tax purposes until the employees exercise the options and Nike recognizes a tax benefit. This means that Nike's taxable income will be higher than its financial statement income, resulting in a deferred tax liability.

This Year, Nilo Inc