In 2013, Merlin received the right to acquire 1,200 shares of Noble Corporation stock through the company's incentive stock option plan at an exercise price of $17 per share. On January 4, 2018, Merlin exercises the option when the fair market value of the stock is $22 per share. Which of the following is(are) correct statements?
I.Noble can deduct $6,000 as compensation expense in 2018.
II.Merlin does not recognize any income but must include $6,000 as a tax preference item in computing his alternative minimum taxable income.

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

Question

In 2013, Merlin received the right to acquire 1,200 shares of Noble Corporation stock through the company's incentive stock option plan at an exercise price of $17 per share. On January 4, 2018, Merlin exercises the option when the fair market value of the stock is $22 per share. Which of the following is(are) correct statements?
I.Noble can deduct $6,000 as compensation expense in 2018.
II.Merlin does not recognize any income but must include $6,000 as a tax preference item in computing his alternative minimum taxable income.
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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

Statement I is incorrect as the compensation expense is deductible in the year the option is exercised, which is 2018 in this case. Therefore, Noble cannot deduct $6,000 in 2018.

Statement II is correct as Merlin does not recognize any income upon exercise of the option, but the $6,000 difference between the exercise price and fair market value is included as a tax preference item in computing alternative minimum taxable income.

In 2013, Merlin Received the Right to Acquire 1,200 Shares