The following excerpts are from the 2004 financial statements of Microsoft.

Microsoft grants employee stock options (ESO) to employees as part of its compensation plan. These ESOs have an exercise price equal to the market price on the date of grant. Accordingly, because Microsoft accounts for these ESOs using the intrinsic value method of APB Opinion No.25, no compensation expense is recognized in Microsoft€™s financial accounting records.
For income tax purposes, these ESOs are classified as €œnonqualified stock options.€This results in the following income tax treatment:
€¢ For Microsoft employees: Taxable income is created on the date the options are exercised. The amount of the taxable income is equal to the difference between the exercise price and the market price on the exercise date.
€¢ For Microsoft: Microsoft is allowed a tax deduction in the same amount (and at the same time) as the taxable income that is reported by the employees. Using the Microsoft financial statement information, answer the following questions.
1. Microsoft reports that its effective tax rate in 2004 was 33.0%. What was the amount of the income tax deduction Microsoft took in 2004 as a result of the exercise of employee stock options (ESO) by Microsoft employees during the year?
2. Microsoft reports that it had 57,000 full-time employees as of the end of fiscal 2004. What was the average ESO-related taxable income per employee?
3. Why is the $1.100 billion in stock option income tax benefits added in the computation of operating cash flow for 2004?
4. What was the total amount of Microsoft€™s current taxes for 2004? This is the number that would be reported as €œTotal tax for the year€ on Microsoft€™s worldwide income tax return (if there was such a thing). (Note: If you think this question is easy, think about it somemore.)

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From the income tax note in the financial statements: In millions/year ended June 30 Current taxes: 2002 2003 2004 $3.644 575 4,219 $3,940 1,056 4,996 US. and state $3.861 808 4,669 1,146 Current taxes Deferred taxes (1.699) (L968) $3,523 Provision for income taxes $2,520 $4.028 From the statement of changes in stockholders' equity: In millions/year ended June 30 2002 2003 2004 Common stock and paid-in capital Balance, beginning of year Cumulative SFAS 123 retroactive adjustments. Common stock issued Common stock repurchased Stock-based compensation expense Stock Other, net $28,290 6,560 1,655 (676) 3,784 1,596 536 $41,845 $49,234 2.966 (691) 3.749 1365 2.815 (416) 5,734 (989) income tax Balance, end of year $41,845 $49,234 $56.396 From the statement of cash flows: In millions/year ended June 30 2002 2003 2004 Net income Depreciation, amortization, and other noncash items . ..5,355 7.53 8,168 1.186 5.734 380 1.296) 1.100 (894) (1,479) 11,777 (8.929) (2) (12.527) 938 3,784 2,424 1,596 (1.580) 1,393 3,749 Net recognized (gains)losses on investments Stock option income tax benefits Deferred income taxes Unearned revenue Recognition of unearned revenue. Accounts receivable Other current assets Other long-term assets. Other current liabilities Other long-term liabilities **. 1365 11,152 12.519 187 412 (28) (687) (1.623) 64 478 34 2.063 75 $14,509 $15.797 14.626 1.449 216 35 440 Net cash from operations Income taxes pald were $1.9 bilion in fiscal 2002, $28 billion in fiscal 2003, and $2.5 billion in 2004.