(Answered)-1. Which of the following statements are true? I) If the exercise - (2025 Updated Original AI-Free Solution

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Question

?? 1.? Which of the following statements are true?

???? I) If the exercise price equals the market price on the grant date, the option granted has no value.

??? II) The fair value of options increases with the volatility of the underlying stock prices.

??? III) For qualified stock options, there are no tax deductions available to the company.

??? IV) For non-qualified stock options, compensation cost is tax deductible at the time of exercise to the company.

??? A) Only II, III, and IV

??? B) Only I, II, and III

??? C) Only I, II and IV

??? D) Only III and IV

??? E) All of them

2. On January 1, 2009, a company granted 8 million non-qualified employee stock options. The exercise price equals the market price, which is $50 per share. The terms of the award specify three-year cliff vesting. The fair value of option on the grant date is $25 per share. On January 1, 2010, the stock price decreases to $45 and the options remain underwater until they expire. All options have a contractual term of 5 years. Tax rate is 40% and additional paid-in capital has a balance of $20 million for windfall tax benefits. What is the journal entry in 2013 when options expire?

????? A) Income tax expense? 80 mil

??????????????????? Deferred tax assets??????????????????? 80 mil

????? B) Paid-in capital--stock options??? 200 mil

??????????????????? Deferred tax assets??????????????????????? 80 mil

??????????????????? Retained earnings???????????????????????? 120

????? C) Paid-in capital--windfall tax benefits???? 20 mil

?????????? Income tax expense???????????????????????????? 60 mil

??????????????????? Deferred tax assets?????????????????????????????????????? 80 mil

????? D) Paid-in capital--stock options??? 200 mil

??????????????????? Deferred tax assets?????????????????????????? ??200 mil

3. Which of the following statements are true?

?????? I) The journal entry for sell-off is:?

????????????????????????????? Retained earnings???? xxxx

?????????????????????????????????????? Book value of the equity method investment??? xxxx

?????? II) The journal entry for split-off (pro rata distribution) is:

????????????????????????????? Treasury stock?????????? xxxx

??????????????????????????????????????? Book value of the equity method investment??? xxxx

?????? III) The journal entry for split-off (non pro rate distribution) is:

?????????????????????????????? Treasury stock????????? xxxx

??????????????????????????????????????? Book value of the equity method investment??? xxxx

??????????????????????????????????????? Gain/Loss on distribution????????????????????????????????? xxxx

????? IV) The journal entry for spin-off is:

?????????????????????????????? Cash??????????????????????? xxxx

??????????????????????????????????????? Book value of the equity method investment??? xxxx

?????????????? ?????????????????????????Gain/Loss on spin-off??????????????????????????????????????? xxxx

???? A) Only I and II

???? B) Only II and III

???? C) Only I and IV

???? D) Only I, II, and III

???? E) All of them

1. Which of the following statements are true?
I) If the exercise price equals the market price on the grant date, the option granted has no value.
II) The fair value of options increases with the volatility of the underlying stock prices.
III) For qualified stock options, there are no tax deductions available to the company.
IV) For non-qualified stock options, compensation cost is tax deductible at the time of exercise to the company.
A) Only II, III, and IV
B) Only I, II, and III
C) Only I, II and IV
D) Only III and IV
E) All of them
2. On January 1, 2009, a company granted 8 million non-qualified employee stock options. The exercise price equals
the market price, which is $50 per share. The terms of the award specify three-year cliff vesting. The fair value
of option on the grant date is $25 per share. On January 1, 2010, the stock price decreases to $45 and the
options remain underwater until they expire. All options have a contractual term of 5 years. Tax rate is 40% and
additional paid-in capital has a balance of $20 million for windfall tax benefits. What is the journal entry in
2013 when options expire?
A) Income tax expense 80 mil
Deferred tax assets
80 mil
B) Paid-in capital--stock options 200 mil
Deferred tax assets
80 mil
Retained earnings
120
C) Paid-in capital--windfall tax benefits 20 mil
Income tax expense
60 mil
Deferred tax assets
80 mil
D) Paid-in capital--stock options 200 mil
Deferred tax assets
200 mil
3. Which of the following statements are true?
I) The journal entry for sell-off is:
Retained earnings xxxx
Book value of the equity method investment xxxx
II) The journal entry for split-off (pro rata distribution) is:
Treasury stock
xxxx
Book value of the equity method investment xxxx
III) The journal entry for split-off (non pro rate distribution) is:
Treasury stock
xxxx
Book value of the equity method investment xxxx
Gain/Loss on distribution
xxxx
IV) The journal entry for spin-off is:
Cash
xxxx
Book value of the equity method investment xxxx
Gain/Loss on spin-off
xxxx
A) Only I and II
B) Only II and III
C) Only I and IV
D) Only I, II, and III
E) All of them