This year, Gogo Inc. granted a nonqualified stock option to Mrs. Mill to buy 10,000 shares of Gogo stock for $8 per share for five years. At date of grant, Gogo stock was selling on a regional securities market for $7.87 per share. Gogo recorded $26,700 compensation expense for the estimated value of the option.
a. How much income must Mrs. Mill recognize this year?
b. Can Gogo deduct the $26,700 expense on this year’s tax return?
c. Assuming a 35 percent tax rate, compute Gogo’s deferred tax asset or deferred tax liability (identify which) resulting from the $26,700 compensation expense.