If bishop had previously expensed a total of $100 per books as the options vested. The effect on the book-tax difference at exercise is: $100 reversal of an unfavorable temporary difference and a $300 permanent favorable difference.
The amount of $100 unfavorable difference will be reversed while the extra tax benefit of the amount of $300 will create a favorable permanent difference.
The favorable difference of the amount of $300 will be reported in shareholders' equity as wind fall tax benefit and as well recorded as additional paid-in capital.
The favorable permanent difference is calculated as:
Favorable permanent difference=(100× $4 per option)- $100
Favorable permanent difference=$400-$100
Favorable permanent difference=$300
Therefore the effect on the book-tax difference at exercise is: $100 reversal of an unfavorable temporary difference and a $300 permanent favorable difference.
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