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