Under a nonqualified stock option (NQSO)plan which is granted to Damon on March 15,2012,he may purchase 200 shares of stock from his employer at $15 per share.At that date,the option does not have a readily ascertainable fair market value.Eight months later on the date of exercise the fair market value of the stock is $20.On December 1,2014,Damon sells 100 shares for $24 each.Which of the following would be the result of these transactions on the date of exercise and the date of sale?
A)Ordinary income of $1,000 and a long-term capital gain of $400.
B)Ordinary income of $1,200 and a long-term capital gain of $300.
C)Ordinary income of $2,400 and a long-term capital gain of $0.
D)Ordinary income of $1,000 and a short-term capital gain of $400.
E)None of these.

Question

Quizplus · Accepted Answer

Because the nonqualified stock option does not have a readily ascertainable fair market value at the date of the grant,Damon must recognize ordinary income of $1,000 ($5 × 200 shares)at the exercise date.At the sales date,Damon recognizes a long-term capital gain of $400 ($4 × 100 shares).

Under a Nonqualified Stock Option (NQSO)plan Which Is Granted to Damon