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Grant date | |||
Dr. Fixed assets
| $1,000 | ||
Cr. Additional paid-in capital
| $1,000 | ||
To capitalize the portion of stock-based compensation cost associated with the self-constructed asset | |||
Depreciation—Year 1 | |||
Dr. Depreciation expense
| $100 | ||
Cr. Accumulated depreciation
| $100 | ||
To record annual depreciation expense for the portion of the cost of the self-constructed asset related to stock-based compensation
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Dr. Deferred tax asset
| $25 | ||
Cr. Deferred tax expense
| $25 | ||
To record the increase in the deferred tax asset associated with the annual depreciation expense for the portion of the cost of the self-constructed asset related to stock-based compensation ($100 × 25% tax rate).
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Depreciation—Year 2
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Dr. Depreciation expense
| $100 | ||
Cr. Accumulated depreciation
| $100 | ||
To record annual depreciation expense for the portion of the cost of the self-constructed asset related to stock-based compensation
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Dr. Deferred tax asset
| $25 | ||
Cr. Deferred tax expense
| $25 | ||
To record the increase in the deferred tax asset associated with the annual depreciation expense for the portion of the cost of the self-constructed asset related to stock-based compensation ($100 × 25% tax rate). At end of year two, deemed tax basis is $1,000 and book basis is $800.
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Exercise of options—end of Year 2
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Dr. Income taxes payable
| $1,250 | ||
Cr. Income tax benefit
| $1,250 | ||
To record the current tax benefit from the tax deduction as result of the employee’s exercise of the option ($5,000 tax deduction × 25% tax rate).
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Dr. Deferred tax expense
| $250 | ||
Cr. Deferred tax asset
| $50 | ||
Cr. Deferred tax liability
| $200 | ||
To record the deferred tax effects of the employee’s exercise of the option, which includes the recovery of the $50 deferred tax asset established in years 1 and 2 and the recognition of the deferred tax liability for the excess of the book over tax basis of the asset at the end of year 2 ($800 basis difference × 25% tax rate).
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