Deck 12: Compensation

Question 1

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

Answer 1

True

Question 2

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

Answer 2

False

Question 3

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

Answer 3

True

Question 4

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

Question 5

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

Question 6

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

Question 7

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

Question 8

Employers computing taxable income under the accrual method to unrelated taxpayers may deduct wages accrued as compensation expense in one year and paid in the subsequent year, as long as the company makes the payment within two and a half months after the employer's year-end.

Question 9

Without an election, the income from an employee's restricted stock is measured on the grant date.

Question 10

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

Question 11

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

Question 12

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

Question 13

Stock options will always provide employees with future compensation.

Question 14

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

Question 15

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

Question 16

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

Question 17

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

Question 18

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

Question 19

On Form W-4, an employee can change their withholding through claiming dependents, other adjustments for non-wage income or deductions, and choosing extra withholding.

Question 20

One primary purpose of equity compensation is to motivate employees.

Question 21

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

Question 22

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

Question 23

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

Question 24

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

Question 25

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

Question 26

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

Question 27

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

Question 28

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

Question 29

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

Question 30

Which of the following statements regarding compensation is false?

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

Question 31

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

Question 32

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

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

Question 33

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

Question 34

Health insurance is an example of a nontaxable fringe benefit.

Question 35

Fringe benefits are generally a form of noncash compensation.

Question 36

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

Question 37

For 2020, up to $300 of transportation fringe benefits can be excluded from income.

Question 38

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

Question 39

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

Question 40

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

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

Question 41

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 employees.
B)The limitation applies to all officers.
C)The limitation applies only to the CEO and three other highest compensated officers.
D)The limitation applies only to the CEO, CFO, three other highest compensated officers, and all covered employees from previous years.

Question 42

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

Question 43

Which of the following statements regarding restricted stock is false?

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

Question 44

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

A)It determines an employee's income tax withholding.
B)Employees can claim dependents.
C)Employees can specify additional amounts to be withheld each month.
D)The form can only be adjusted at the beginning of the year or start of employment.

Question 45

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

Question 46

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

Question 47

Maren received 11 NQOs (each option gives her the right to purchase 14 shares of stock for $10 per share)at the time she started working when the stock price was $7 per share. When the share price was $16 per share, she exercised all of her options. Eighteen months later she sold all of the shares for $21 per share. What is the amount of Maren's bargain element?

A)$0
B)$924
C)$1,386
D)$2,464
E)None of the choices are correct.

Question 48

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 the options on the exercise date?

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

Question 49

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)Income recognized on the exercise date is greater for incentive stock options than nonqualified options.
D)The bargain element on a nonqualified option is taxed to employees at capital gain rates.

Question 50

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

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

Question 51

Maren received 12 NQOs (each option gives her the right to purchase 7 shares of stock for $10 per share)at the time she started working when the stock price was $8 per share. When the share price was $20 per share, she exercised all of her options. Eighteen months later she sold all of the shares for $23 per share. How much gain will Maren recognize on the sale of the shares and how much tax will she pay assuming her marginal tax rate is 37 percent?

A)$0 gain and $0 tax
B)$252 gain and $50 tax
C)$252 gain and $93 tax
D)$1,092 gain and $218 tax

Question 52

Stevie recently received 1,000 shares of restricted stock from her employer, Nicks Corporation, when the share price was $8 per share. Stevie's restricted shares vested three 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)$0
B)$5,000
C)$8,000
D)$11,000

Question 53

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 Maren recognize on the sale of the shares and how much tax will she pay assuming her marginal tax rate is 37 percent?

A)$0 gain and $0 tax
B)$500 gain and $100 tax
C)$500 gain and $185 tax
D)$1,200 gain and $240 tax

Question 54

For compensation plans adopted by a publicly traded company in the current year, when a CEO's salary exceeds $1,000,000, the employee ______ taxed 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
D)is not; is not

Question 55

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

Question 56

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

Question 57

Tom recently received 2,110 shares of restricted stock from his employer, Independence Corporation, when the share price was $12 per share. Tom's restricted shares vested three years later when the market price was $16. Tom held the shares for a little more than a year and sold them when the market price was $14. What is the amount of Tom's income or loss on the sale?

A)$0
B)$2,110 loss
C)$4,220 gain
D)$4,220 loss

Question 58

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

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

Question 59

How is the bargain element for a stock option calculated?

A)The difference between the strike price and the market price on the date of grant
B)The difference between the market price on the exercise date 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 60

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

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

Question 61

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

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

Question 62

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

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

Question 63

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's income?

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

Question 64

Grace's employer is now offering group-term life insurance. The company will provide each employee with $200,000 of group-term life insurance. It costs Grace's employer $700 to provide this amount of insurance to Grace each year. Assuming that Grace is 43 years old, use the table to determine the monthly premium that Grace must include in income as a result of receiving the group-term life benefit. Uniform Premiums for $1,000 of Group-Term Life Insurance Protection:

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

Question 65

Rachel receives employer-provided health insurance. The employer's cost of the health insurance is $6,400 annually. What is her employer's after-tax cost of providing the health insurance, assuming that the employer's marginal tax rate is 21 percent andthe employer is profitable?

A)$0
B)$1,344
C)$5,056
D)$6,400

Question 66

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

Question 67

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

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

Question 68

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

A)The election allows employees of any corporation to defer income tax liability.
B)The election is an important tax-planning tool for illiquid equity grants.
C)The election must be made within 30 days of the grant date.
D)The election may terminate on the date the employer stock becomes publicly traded.

Question 69

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 2020, Tanya selected $3,480 ($290 per month)of parking, $1,720 in 401(k)contributions, and $800 of cash. How much must Tanya include in taxable income?

A)$0
B)$1,040
C)$3,480
D)$4,280

Question 70

Which of the following statements concerning cafeteria plans is true?

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

Question 71

Stevie recently received 1,080 shares of restricted stock from her employer, Nicks Corporation, when the share price was $9 per share. Stevie's restricted shares vested three years later when the market price was $12. Stevie held the shares for a little more than a year and sold them when the market price was $15. Assuming Stevie made a section 83(b)election, what is the amount of Stevie's ordinary income with respect to the restricted stock?

A)$0
B)$3,240
C)$9,720
D)$12,960

Question 72

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

A)The discount relates to goods or services of the employer.
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 employee discount on goods is not greater than employer's average gross profit.

Question 73

Which of the following is false regarding dependent-care expenses?

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

Question 74

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

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

Question 75

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

A)$0
B)$2,455
C)$2,950
D)$22,000

Question 76

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

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

Question 77

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 21 percent and the employer is profitable?

A)$0
B)$1,260
C)$4,740
D)$6,000

Question 78

Stevie recently received 1,000 shares of restricted stock from her employer, Nicks Corporation, when the share price was $8 per share. Stevie's restricted shares vested three 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 a section 83(b)election, what is the amount of Stevie's ordinary income with respect to the restricted stock?

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

Question 79

Bonnie's employer provides her with an annual dinner club membership costing $5,000. Her marginal tax rate is 24 percent. Her employer has a marginal tax rate of 21 percent. What is Bonnie's after-tax benefit?

A)$0
B)$1,200
C)$3,800
D)$5,000

Question 80

Grace's employer is now offering group-term life insurance. The company will provide each employee with $155,000 of group-term life insurance. It costs Grace's employer $785 to provide this amount of insurance to Grace each year. Assuming that Grace is 43 years old, use the table to determine the monthly premium that Grace must include in income as a result of receiving the group-term life benefit. Uniform Premiums for $1,000 of Group-Term Life Insurance Protection:

A)$0
B)$10.50
C)$19.50
D)$57.63