Carmelo, an employee of the Rondo Corporation, is granted an option to acquire 400 shares of the company's stock under its nonqualified stock option plan. Which of the following are correct statements?
I.If the option has a readily ascertainable fair market value, Carmelo must report income equal to the fair market value of the option times the number of shares granted (i.e., 400 shares).
II.If the option does not have a readily ascertainable fair market value Carmelo will not report any income at the date of grant.

A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.

Question

Carmelo, an employee of the Rondo Corporation, is granted an option to acquire 400 shares of the company's stock under its nonqualified stock option plan. Which of the following are correct statements?
I.If the option has a readily ascertainable fair market value, Carmelo must report income equal to the fair market value of the option times the number of shares granted (i.e., 400 shares).
II.If the option does not have a readily ascertainable fair market value Carmelo will not report any income at the date of grant.
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A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.

Quizplus · Accepted Answer

Both statements are correct. Statement I is true because if a nonqualified stock option has a readily ascertainable fair market value at the time it is granted, the recipient must recognize income equal to the fair market value of the option times the number of shares granted. Statement II is accurate because if the option does not have a readily ascertainable fair market value, the recipient does not recognize income at the time of the grant. Income recognition occurs later, typically when the option is exercised.

Carmelo, an Employee of the Rondo Corporation, Is Granted an Option