Refer to the Facts in the Below Problem

question 48

Essay

Refer to the facts in the below problem. Five years after Haven granted the option to Olivia, she exercised it on a day when Haven stock was selling for $27 per share.
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 a $16,500 compensation expense for the estimated value of the option.
a. How much income must Olivia recognize in the year of exercise?
b. What is Haven's tax deduction in the year of exercise?
c. What is the effect of the exercise on Haven's book income and deferred taxes?

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Definitions:

Power Cost

The expense incurred by a company for the electricity used in its operations.

Automotive Engines

The specific units within vehicles that convert fuel into mechanical power, allowing the vehicle to move.

Materials Quantity Variance

The discrepancy between what was actually used in terms of material for production and what was anticipated, times the standard cost for each unit.

Direct Material

Primary materials used in the making of a product that can be directly traced to the finished good.