The Johnson Co. grants options on 5,000 shares of its common stock. The fair market value of each option on the grant date is $3 per share. The exercise price is $2. The tax rate (all years) is 20%. The options were exercise in 2011. Pretax income for 2011 was $50,000.
a) How much tax expense is recognized for 2011 if the fair market value of the stock on the exercise date was $3 per share?
b) How much tax expense is recognized to 2011 is the fair market value of Johnson's stock on the exercise date was $11 per share?
c) How much income tax expense is recognized by Johnson for 2011 if the market price of the stock on the exercise date is $5.