This Year,Haven Corporation Granted a Nonqualified Stock Option to Olivia

question 108

Essay

This year,Haven Corporation granted a nonqualified stock option to Olivia to buy 5,000 shares of Haven stock for $20 for five years.At date of grant,Haven stock was selling on the Nasdaq for $19 per share.For financial statement purposes,Haven recorded $16,500 compensation expense for the estimated value of the option.
a.How much income must Olivia recognize as a result of the grant of the option?
b.Can Haven deduct the $16,500 compensation expense on this year's tax return?
c.Assuming a 21% tax rate,compute Haven's deferred tax asset or deferred tax liability (identify which)resulting from the $16,500 compensation expense.

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Definitions:

Dividend Income Distributions

These are payments made by a corporation to its shareholders, usually derived from the company's earnings.

Capital Gains

The increase in value of an asset or investment above its purchase price, realized when the asset is sold.

NAV

Net Asset Value (NAV) represents the per-share market value of all the securities held by a mutual fund, ETF, or similar investment vehicle, calculated by subtracting the fund's liabilities from its assets and dividing by the number of shares outstanding.

Income Distributions

Payments made to investors from the income generated by the assets within a fund or investment, such as dividends or interest payments.