Question

Begining of year 1

Issued 6,000 restricted share units and 10,000 stock options to employees. The shares are currently trading for $10 per share. The option exercise price is set equal to $10 and the fair value of each option is $3. The vesting service period for the restricted share units and stock options is 18 months.

Other information: The firm expects all of the employees receiving restricted share units and stock options will remain for the 18 month required service period.

At the end of year 2 employees exercised all of their 10,000 options. The fair value of the firm’s stock on this date is $19 per share. The firm’s stock had a value of $13 per share on June 30 of Year 2 when the restricted stock units and the stock options vested.

The firm receives a deduction equal to the employee’s gain on the exercise of the option when the option is exercised and a deduction for value of restricted share units when the restrictions elapse.

Pre tax accounting income year 1: $900,000

Pre tax accounting income year 2: $1,200,000

Tax rate 30%.

Please find the taxable income, deferred tax asset and libility for year 1 and 2.

Answer 1

01. Computation of taxable Income
Particular	Year 1	Year 2
Pre tax accounting Income	9,00,000	12,00,000
Add: Expenses disallowed under Income Tax Act	46,666	-
Less: Expenses allowed under Income tax Act	-	-46,666
Income under Income tax Act	9,46,666	11,53,334
02. Computation of Income tax
Calculation of Tax	Year 1	Year 2
Taxable book Income	9,00,000	12,00,000
Tax rate	30%	30%
Tax as per books. (A)	2,70,000	3,60,000
Taxable Income as per Income tax Act	9,46,666	11,53,334
Tax rate	30%	30%
Tax as per Income tax Act (B)	2,84,000.00	3,46,001.00
(A-B)	-14,000.00	13,999.00
DTA/DTL	DTA	DTL
Working Note 01.	Year 1	Year 2
No of Shares	10,000.00	10,000.00
Exercise price of shares	10	10
Fair value	3	19
Expenses to be recognised per share	7	9
Total Expenses	70,000.00	90,000.00
Remaining period	18 Months	-
Amount already recognised	-	46,666.00
Expenses to be recognised in current year	46,666.00	43,334.00
W.Note 2: Book profit is assumed to be after deducting share issue expenses
W.Note 3. In Year 2, excess of tax payable over tax payable as per books will be credited to DTA created in Year 1.