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In: Accounting

All of the following statements concerning incentive stock options (ISOs) are correct, EXCEPT: ​(A)​ISOs cannot be...

All of the following statements concerning incentive stock options (ISOs) are correct, EXCEPT: ​(A)​ISOs cannot be exercised more than 2 years after the date of issue. ​(B)​Employees receive more favorable tax treatment with ISOs than with nonqualified stock options. ​(C)​Nonqualified stock options are more flexible than ISOs. ​(D)​ISOs are only exercisable by an employee and are nontransferable except in the event of death.

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Expert Solution

Ans: Following are the statements regarding Incentive Stock Options:

(a) Incentive Stock Option cannot be exercised more than 2 years after the date of issue- The given statement is Incorrect. If an organization wants to grant ISO, they need to follow a number of rules. One of them is that the options can’t have more than a 10-year life. If an employee completes the 10-year expiration date, and they have not exercised their vested stock options, those options stands forfeited and get absorbed back into the company.

(b) Employees receives more favorable tax treatment with Incentive Stock Options than with Non qualified Stock Options- The given statement is Correct. With Non qualified Stock Options, the spread on option is taxed on the date of exercise at normal income tax rates even if the shares are unsold. Incentive Stock Options on the other hand, if fulfill the requirements, allow holders of the option not to pay tax until the shares are sold and then pay capital gains tax on the difference between grant price and sale price.

(c) Non qualified stock options are more flexible than Incentive Stock Options- The given statement is Correct. Non Qualified Stock Options may have higher taxes, but they are a lot more flexible as they can be granted to anyone and how they can be exercised. Also they are flexible in terms of value, holding period and transferability.

(d) Incentive Stock Options are only exercisable by employee and are non transferable except in the event of death- The given statement is Correct. The terms of Incentive Stock options restricts the transfer of the option by the employee other than by will or in the event of death and also states that the option is exercisable only by employee during his lifetime.

Therefore, all the statements concerning Incentive Stock Options are correct except (a)

ekkarill92 answered 2 years ago
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