Deck 12: Compensation

Question 1

An employee can indicate whether they want an additional amount withheld for payrolltaxes on the Form W-4.

Answer 1

True

Question 2

Employers computing taxable income receive a deduction for reasonable salary andwages paid to employees.

Answer 2

True

Question 3

Stock options will always provide employees with future compensation.

Answer 3

False

Question 4

Employers computing taxable income under the accrual method to unrelated taxpayersmay deduct wages accrued as compensation expense in one year and paid in thesubsequent year, as long as the company makes the payment within 2½ months after the employer's year-end.

Question 5

The employee's income for restricted stock is typically measured on the grant date.

Question 6

The use of restricted stock is increasing relative to the use of stock options.

Question 7

One primary purpose of equity compensation is to motivate employees.

Question 8

One purpose of Form W-4 is to determine an employee's withholding.

Question 9

The date on which stock options are no longer subject to forfeiture is called the vesting date.

Question 10

An employee's income with respect to restricted stock is the fair market value on the vesting date.

Question 11

Current compensation is usually comprised of salary, wages, and bonuses.

Question 12

Employers always prefer to award incentive stock options rather than nonqualified stock options.

Question 13

Employees will always prefer to receive incentive stock options over nonqualified stock options.

Question 14

Employees complete a Form W-2 to specify their income tax withholding.

Question 15

Employers receive a deduction for compensation paid to and employment taxes paid onbehalf of employees.

Question 16

Employer's expense for stock options is typically recognized earlier for book than tax purposes.

Question 17

On Form W-4, an employee can only claim one allowance for each personal ordependency exemption that will be claimed on the employee's income tax return.

Question 18

The date on which stock options are given to the employee is called the exercise date.

Question 19

An employer always receives a deduction for total compensation paid to a CEO.

Question 20

When stock options are exercised they are converted into actual employer stock.

Question 21

A cafeteria plan provides employees discounted meals at a company sponsored dining room.

Question 22

Taxable fringe benefits include automobile allowances, gym memberships, and personal use tickets to the theatre or sporting events.

Question 23

Which of the following forms is filled out by an employee, who is a citizen, at the beginning of an employment relationship?

A) Form Q-2.
B) Form 1099.
C) Form W-2.
D) Form W-4.

Question 24

Fringe benefits are generally a form of non-cash compensation.

Question 25

Employers cannot discriminate between highly and non-highly compensated employees when providing taxable fringe benefits.

Question 26

Hotel employees can receive free nights lodging on a space available basis without incurring compensation.

Question 27

Employees may exclude from income items such as occasional theatre tickets, t-shirts, or a Thanksgiving turkey.

Question 28

Group-term life insurance is a fringe benefit that can be partially taxable and partially tax free.

Question 29

Up to $10,000 of dependent care expenses can be excluded from an employee's compensation.

Question 30

If certain conditions are met, an apartment manager can exclude the fair market value of free rent from his or her income.

Question 31

Which of the following statements regarding compensation is false?

A) Bonuses are a form of compensation obtained if certain criteria are met.
B) Bonuses paid within 2½ months of year-end are included in employee's compensation in the year they were earned.
C) Wages are usually paid by the hour.
D) Salary is usually a form of fixed compensation.

Question 32

Cornhusker Bank reimburses employees for dues to the local banker's association. The reimbursement is includible in the employee's income.

Question 33

A section 83(b) election freezes the value of restricted stock for compensation purposes on the vesting date.

Question 34

For 2017, up to $300 of qualified transportation fringe benefits can be excluded from income.

Question 35

Flexible spending accounts allow employees to set aside before-tax dollars for medical and dependent care expenses.

Question 36

Up to $5,250 of educational benefits can be excluded from an employee's compensation.

Question 37

Health insurance is an example of a nontaxable fringe benefit.

Question 38

Qualified employee discounts allow employees to purchase employer goods at a discount.

Question 39

Employers sometimes pay a "gross-up" to employees to cover taxes associated with taxable fringe benefits they provide.

Question 40

Which of the following items is not included on an employee's Form W-2?

A) Social Security withholding.
B) Taxable wages, tips, and compensation.
C) Federal and state income tax withholding.
D) Value of stock options granted during the year.

Question 41

Which of the following statements regarding restricted stock is false?

A) Even if the value of restricted stock decreases from the price on the grant date, it retains some value to the employee.
B) Like stock options, restricted stock has to vest before it can be sold.
C) Like nonqualified stock options, the employee's income inclusion for restricted stock is the bargain element.
D) There is no effective tax planning elections for restricted stock.

Question 42

Which of the items is not correct regarding withholding?

A) Married employees can choose to have income tax withholding on wages withheld at the higher single rates.
B) Employees can claim exempt status and avoid withholding.
C) Employees that also have self-employment income can have additional amounts of federal tax withheld to avoid estimated tax payments.
D) Employees cannot claim an allowance for a child unless they are entitled to claim the child as a dependent.

Question 43

Tom recently received 2,000 shares of restricted stock from his employer, Independence Corporation, when the share price was $10 per share. Tom's restricted shares vested three years later when the market price was $14. Tom held the shares for a little more than a year and sold them when the market price was $12. What is the amount of Tom's income or loss on the sale?

A) $4,000 loss.
B) $2,000 loss.
C) $0.
D) $4,000 gain.

Question 44

Which of the following is false regarding a section 83(b) election?

A) If an employee leaves before the vesting date, any loss is limited to $3,000.
B) The election freezes the value of the employee's compensation as of the grant date.
C) The election must be made within 30 days of the grant date.
D) The election is an important tax planning tool if the stock is expected to increase in value.

Question 45

Which of the following statements regarding income tax withholding is incorrect?

A) The withholding tables are designed so that employee withholding approximates the tax liability.
B) The withholding tables vary based on filing status.
C) Extra allowances can be claimed and reduce withholding.
D) Large itemized deductions require the need for additional withholding.

Question 46

Which of the following regarding the Form W-4 is incorrect?

A) The form can only be adjusted at the beginning of year or start of employment.
B) Determines an employee's income tax withholding.
C) Employees can claim more allowances than personal exemptions that will be claimed.
D) Employees can specify additional amounts to be withheld each month.

Question 47

Which of the following is true regarding stock options?

A) A loss is realized when stock options lapse.
B) There is typically no tax effect on the grant date.
C) The bargain element on a nonqualified option is taxed to employees at capital gain rates.
D) Income recognized on the exercise date is greater for incentive stock options than nonqualified options.

Question 48

Stevie recently received 1,000 shares of restricted stock from her employer, NicksCorporation, when the share price was $8 per share. Stevie's restricted shares vestedthree years later when the market price was $11. Stevie held the shares for a little more than a year and sold them when the market price was $16. What is the amount of Stevie's ordinary income with respect to the restricted stock?

A) $11,000.
B) $8,000.
C) $0.
D) $5,000.

Question 49

Aharon exercises 10 stock options awarded several years ago. The following information pertains to the options: (1) each option gives the employee the right to buy 10 shares, (2) the market price on the grant date was $7, (3) the strike price is $10, and (4) the market price on the exercise date was $15. How much will it cost Aharon to purchase theoptions on the exercise date?

A) $500.
B) $90.
C) $1,000.
D) $700.

Question 50

Which of the following isn't reported on the Form W-2?

A) Indication as to whether an employee had more than one employer during the year.
B) The employee's taxable salary and wages.
C) Annual Federal and state withholding information.
D) Annual amount of Social Security and Medicare tax withholding information.

Question 51

Maren received 10 NQOs (each option gives her the right to purchase 10 shares of stock for $8 per share) at the time she started working when the stock price was $6 per share. When the share price was $15 per share, she exercised all of her options. Eighteen months later she sold all of the shares for $20 per share. What is the amount of Maren's bargain element?

A) $900.
B) $700.
C) $0.
D) $1,500.
E) None of the choices are correct.

Question 52

Which of the following pairs of items is not needed to calculate the after-tax proceeds for a same-day sale?

A) Strike price and market price on exercise date.
B) Market price on sale date and marginal tax rate.
C) Market price on sale date and market price on exercise date.
D) Strike price and market price on grant date.

Question 53

How is the bargain element for a stock option calculated?

A) The difference between the market price on the exercise date and the market price on the date of grant.
B) The difference between the strike price and the market price on the date of grant.
C) The difference between the market price on the exercise date and the strike price.
D) The difference between the market price on the sale date and the strike price.

Question 54

Which of the following refers to the date stock options are awarded to an employee?

A) Exercise date.
B) Lapse date.
C) Grant date.
D) Vesting date.

Question 55

Maren received 10 NQOs (each option gives her the right to purchase 10 shares of stock for $8 per share) at the time she started working when the stock price was $6 per share. When the share price was $15 per share, she exercised all of her options. Eighteen months later she sold all of the shares for $20 per share. How much gain will Marenrecognize on the sale of the shares and how much tax will she pay assuming her marginal tax rate is 39.6 percent?

A) $500 gain and $175 tax.
B) $0 gain and $0 tax.
C) $500 gain and $100 tax.
D) $1,200 gain and $180 tax.

Question 56

Which of the following statements is true regarding the $1,000,000 limit on covered employees for publicly-traded companies?

A) The limitation applies to all officers.
B) The limitation applies only to the CEO and three other highest compensated officers.
C) The limitation applies to all employees.
D) The limitation applies only to the CEO and three other highest compensated officers, not including the CFO.

Question 57

Bad Brad received 20 NQOs (each option gives him the right to purchase 30 shares of stock for $12 per share) from his employer. At the time he started working, the stock price was $11 per share. Now that the share price is $25 per share, he exercises all of the options. Two years later Bad Brad sells the stock for $27 per share. What is Bad Brad's basis in his stock for purposes of calculating the gain or loss at the time of the sale?

A) $16,200.
B) $15,000.
C) $7,200.
D) $7,800.

Question 58

Tom recently received 2,000 shares of restricted stock from his employer, Independence Corporation, when the share price was $10 per share. Tom's restricted shares vested three years later when the market price was $14. Tom held the shares for a little more than a year and sold them when the market price was $20. What is the amount of Tom's income or loss on the vesting date?

A) $10,000.
B) $20,000.
C) $0.
D) $28,000.

Question 59

on the entire amount, and the employer ________ allowed a deduction on the entire amount.

A) is; is
B) is; is not
C) is not; is not
D) is not; is

Question 60

Which of the following is not a purpose of equity-based compensation?

A) Avoid compensation limits for certain publicly-traded company executives.
B) Motivate employees by aligning employee and employer incentives.
C) Provides a low or no cost form of compensation.
D) Provide both risk and incentives to employees.

Question 61

Francis works for a local fly fishing shop. The shop allows employees to purchase two fly rods per year at a discount. This year, Francis purchased one rod. The rod normally retails for $300, was purchased for $225, was sold to Francis for $250, and the employer's average gross profit percentage is 30 percent. What amount of the discount must be included in Francis' income?

A) $0.
B) $40.
C) $25.
D) Some other amount.

Question 62

Which of the following is not a requirement of a "qualified employee discount"?

A) The employee discount on goods is not greater than employer's average gross profit.
B) The discount on services doesn't exceed 20 percent of the price offered to customers.
C) The discount can be elected up to five times annually.
D) The discount relates to goods or services of the employer.

Question 63

A) $22.00.
B) $58.33.
C) $15.00.
D) $0.

Question 64

Kevin is the financial manager of Levingston BMW. The shop allows employees to purchase72u) p to two vehicles at a discount. Levingston's average gross profit percentage is 15%. This year Kevin purchased a 530 model and a new M3. What amount must Kevin include in income?

A) $2,950.
B) $22,000.
C) $2,500.
D) $0.

Question 65

Which of the following is not an example of a nontaxable fringe benefit?

A) Employer provided parking of $100 per month.
B) Qualified employee discounts.
C) Monthly employer provided transit benefit of $100.
D) Group-term life insurance policy providing $100,000 of coverage.

Question 66

Tanya's employer offers a cafeteria plan that allows employees to choose among a number of benefits. Each employee is allowed $6,000 in benefits. For 2017, Tanyaselected $3,300 ($275 per month) of parking, $2,200 in 401(k) contributions, and $800 of cash. How much must Tanya include in taxable income?

A) $1,040.
B) $4,000.
C) $1,120.
D) $0.

Question 67

Which of the following does not qualify as a "for the convenience of the employer" nontaxable fringe benefit?

A) An overtime meal provided to an employee while working late.
B) A meal provided by a hospital to residents during their shift.
C) A company picnic.
D) The fair market value of the rent of an apartment manager living on the premises.

Question 68

Which of the following benefits cannot be excluded as a no additional cost service fringe benefit?

A) Complementary dry cleaning for employees at a laundry company.
B) Free local phone service for phone company employees.
C) A car wash at an automobile dealership.
D) Free tax return preparation from a client.

Question 69

Stevie recently received 1,000 shares of restricted stock from her employer, NicksCorporation, when the share price was $8 per share. Stevie's restricted shares vestedthree years later when the market price was $11. Stevie held the shares for a little more than a year and sold them when the market price was $16. Assuming Stevie made asection 83(b) election, what is the amount of Stevie's ordinary income with respect to the restricted stock?

A) $0.
B) $8,000.
C) $11,000.
D) $5,000.

Question 70

Tasha receives reimbursement from her employer for dependent care expenses for up to$8,000. Tasha applies for and receives reimbursement of $6,000 for her 10-year-old son. How much, if any, is includible in her income?

A) $6,000.
B) $0.
C) $3,000.
D) $1,000.

Question 71

Lara, a single taxpayer with a 30 percent marginal tax rate, desires health insurance. The health insurance would cost Lara $5,000 to purchase if she pays for it herself (Lara's AGI is too high to receive any tax deduction for the insurance as a medical expense). Lara's employer has a 40 percent marginal tax rate. Ignoring payroll taxes, what is themaximum amount of before-tax salary Lara would give up to receive health insurance?(Round your answer to the nearest whole number)

A) $5,000.
B) $1,500.
C) $8,333.
D) $7,143.

Question 72

Bonnie's employer provides her with an annual dinner club membership costing $5,000.Her marginal tax rate is 25 percent. Her employer has a marginal tax rate of 35 percent. What is Bonnie's after-tax benefit?

A) $5,000.
B) $0.
C) $1,250.
D) $3,750.

Question 73

Big Bucks, a publicly-traded corporation, paid its CEO $1,500,000 of base compensation for the year. What is the after-tax cost of paying the salary assuming a 30 percent marginal tax rate?

Question 74

Which of the following is a fringe benefit that employers can discriminate among employees?

A) Qualified employee discount.
B) No additional cost service.
C) Qualified transportation fringe.
D) Employee educational assistance.

Question 75

Rachel receives employer provided health insurance. The employer's cost of the health insurance is $6,000 annually. What is her employer's after-tax cost of providing the health insurance, assuming that the employer's marginal tax rate is 35 percent and is profitable?

A) $0.
B) $6,000.
C) $4,198.
D) $3,900.

Question 76

Which of the following statements regarding employer provided educational benefits is true?

A) All graduate tuition expenses are included.
B) Only educational benefits from public universities can be excluded.
C) All undergraduate tuition expenses can be excluded.
D) Up to $5,250 in tuition benefits can be excluded.

Question 77

Leesburg paid its employee $200,000 of compensation for the year. What is the after-tax cost of paying the salary assuming a 30 percent marginal tax rate (ignore payroll taxes)?

Question 78

Which of the following is not an example of a taxable fringe benefit?

A) $1,000,000 group term life insurance policy.
B) $225 of employer provided parking.
C) Automobile allowance.
D) Personal use of corporate jet.

Question 79

Which of the following statements concerning cafeteria plans is true?

A) Any receipt of cash option that is elected is treated at taxable compensation.
B) Allows employees to choose from a menu of fringe benefits or to choose cash.
C) Most of the menu choices are nontaxable fringe benefits.
D) All of the statements are true.

Question 80

Which of the following is false regarding dependent care expenses?

A) Dependent children under 13 qualify.
B) Up to $5,000 of reimbursed expenses can qualify.
C) Spouses who are physically or mentally unable to care for themselves qualify.
D) Employers may discriminate among employees.