Accounting Memo Assignment

ACC 331  Writing Assignment

Mary Jones, a senior manager at the CPA firm where you are employed, forwarded you an e- mail from a client (Caroline Wilson, the CFO of MTL Corporation). Mary asks you to write a internal memo to Jaqueline Noble, the CPA firm’s partner on the account, explaining the relevant tax issues and providing advice for the client.  Here is the e-mail from the client:

Hi Jaqueline:

MTL Corporation is having a solid 2020 financial year! However, given the current economic uncertainty and the need to preserve cash, MTL’s Board of Directors has proposed the following changes to my compensation contract for 2020:

• Change the annual cash bonus of $100,000 to a stock bonus of 1,000 shares with a FMV of $100 per share

• Stock-option compensation, select one of two proposals:

o Non-qualified stock option (NQO) to purchase 1,200 shares o Incentive stock options (ISO) to purchase 1,200 shares

The stock bonus is expected to be approved by the Board of Directors on December 28, 2020, and awarded on December 31, 2020. I do not have to make any payment with regard to the stock bonus. For either the NQO or the ISO, the stock options will be granted on Nov 15, 2020, and vest on December 29, 2020, with an exercise price of $15. I plan to exercise on the vesting date as I expect the shares to appreciate further over the next three years. The fair market value for the MTL shares is expected to be $100 per share on December 29, 2020. Stock market projections are for the shares to be valued at $150 per share on December 31, 2021. Regardless of which proposal I choose, I plan to sell the shares from the stock options at the end of 2021.

I want to understand how the award of a stock bonus and each of the two proposed stock options will affect my taxable income for 2020 and 2021. Which stock-option would you advise I choose? Also, I was wondering if you have any tax planning advice in regard to when I should exercise the stock options and/or sell the shares at the end of 2021, is there any tax benefits if I delay my plans? As you may recall, I am in the top marginal tax bracket (37%) for individual taxpayers. I look forward to your advice!

Thanks,

Caroline Wilson

Chief Financial Officer MTL Corporation

Note: The assignment will be graded by the Ernst & Young Communication Center (EYCC) to provide you individualized professional feedback on your writing skills.