On Jan 1 of the current year (CY) Gates is given a nonqualified option to purchase

3,000 shares of stock in his employer at $10/ share for the next 10 years. The

current value of the stock is $10/share. If Gates resigns before the end of the

following year (12/31 CY+1) he forfeits the options. The value of the options is

determined to be $23/share. On May 1 of the 3rd year (CY+2) when the stock is

trading at $50/share Gates gives the company $30,000 to purchase the shares.

4. What if anything is the book expense in years CY, CY+1 and CY+2? 69,000/year1 and year2= 34,500 year 1 and year 2 year 3 69,000.

5. When is the exercise date of the option? May 1

6. What, if anything happens to Gates from a tax perspective when he exercises the

option?

7. What if anything happens to Gatess employer when Gates exercises the option?

8. What are the book/tax differences in each of the years? Are they favorable or

unfavorable, and are they permanent or temporary?

9. If Gates exercised the options when the fair market value of the stock was $19 per

share how would the answer to question 8 change?