Deck 12: Compensation

Question 1

The date on which stock options are given to the employee is called the exercise date.The grant date is the date employees are initially allocated stock options.

Answer 1

False

Question 2

When an employee has more than one employer during the year and the combined compensation exceeds the Social Security wage base,the excess Social Security is treated as an additional income tax payment.

Answer 2

True

Question 3

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

Answer 3

True

Question 4

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

Question 5

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

Question 6

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

Question 7

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

Question 8

One primary purpose of equity compensation is to motivate employees.

Question 9

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

Question 10

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

Question 11

An employer always receives a deduction for total compensation paid to a CEO.Compensation must be reasonable to be deducted.

Question 12

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

Question 13

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

Question 14

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

Question 15

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

Question 16

Stock options will always provide employees with future compensation.

Question 17

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

Question 18

Employers computing taxable income under the accrual method 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 2½ months after the employer's year-end.

Question 19

Some employers believe that restricted stock is superior to stock options.

Question 20

Employees complete a Form W-2 to specify their income tax withholding.Employees use Form W-4 to specify their withholding amounts.

Question 21

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

Question 22

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

Question 23

Health insurance is an example of a nontaxable fringe benefit.

Question 24

An apartment manager can exclude the fair market value of free rent from his or her income.

Question 25

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

Question 26

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

Question 27

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

Question 28

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

Question 29

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 2½ months of year end are included in employee's compensation in the year they were earned.Employees include compensation into income in the year received.

Question 30

For 2013,up to $245 of qualified transportation fringe benefits can be excluded from income.

Question 31

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

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

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

A)Form W-9.
B)Form W-2.
C)Form W-4.
D)Form 1099.Employees fill out a W-4 to indicate their tax status,number of dependents and other items that affect income tax withholding.

Question 34

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

Question 35

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

Question 36

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

Question 37

Up to $10,000 of dependent care expenses can be excluded from an employee's compensation.The limit is $5,000.

Question 38

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

Question 39

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

Question 40

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

Question 41

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.The market price on grant date is not needed.

Question 42

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 43

Which of the following statements is true regarding excess Social Security contributions by an employer?

A)Excess contributions are treated as additional income tax withholding payments.
B)A second employer can stop withholding once an employee's total contributions reach the Social Security wage base.
C)The Treasury returns excess Social Security Withholding to employers.
D)Excess contributions are treated as voluntary contributions to the Treasury.Excess payments are treated as additional voluntary contributions to the Treasury.

Question 44

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

A)Determines an employee's income tax withholding.
B)Employees can claim more allowances than personal exemptions that will be claimed.
C)Employees can specify additional amounts to be withheld each month.
D)The form can only be adjusted at the beginning of year or start of employment.Employees may adjust the Form W-4 throughout the year.

Question 45

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.$1,000 (10 options × 10 shares × $10 exercise price) .

Question 46

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 thesE.10 options × 10 shares × ($15 market price at exercise - $8 exercise price) .

Question 47

Which of the following isn't done by Form W-2?

A)Summarizes the employee's taxable salary and wages.
B)Provides annual Federal and state withholding information.
C)Indicates whether an employee had more than one employer during the year.
D)Generated by an employer annually.The W-2 only provides information about the employer providing the statement.

Question 48

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)$28,000.2,000 × $14 (market price on vesting date) .

Question 49

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

A)The election freezes the value of the employee's compensation at 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.Employees are not allowed to deduct a loss if restricted stock subject to a section 83(b) election is forfeited.

Question 50

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)Large itemized deductions require the need for additional withholding.
C)The withholding tables vary based on filing status.
D)Extra allowances can be claimed and reduce withholding.Itemized deductions reduce the withholding required by the taxpayer.

Question 51

Which of the items is not correct regarding withholding?

A)Employees that also have self employment income can have additional amounts withheld to avoid estimated tax payments.
B)Employees cannot claim an allowance for a child unless they are entitled to claim the child as a dependent.
C)Employees can claim exempt and avoid withholding.
D)Married employees can choose to be withheld at the higher single rates.Additional allowances can be claimed for many purposes (e.g. ,large itemized deductions) in addition to personal and dependency exemptions.

Question 52

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.The grant date is the date on which an employee receives the stock options.

Question 53

Bad Brad received 20 NQOs (each option gives him the right to purchase 30 shares of stock for $10 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 intends to exercise 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?

A)$6,000.
B)$9,000.
C)$15,000.
D)$16,200.The basis is the $6,000 (600 shares × $10 strike price) cash paid and the $9,000 (600 shares × $15 bargain element) income recognized on the exercise-which is equal to the market price on the exercise date less the strike price.

Question 54

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.No tax effect is incurred by employees or employers on the grant 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 Maren recognize on the sale and how much tax will she pay assuming her marginal tax rate is 35 percent?

A)$0 gain and $0 tax.
B)$500 gain and $75 tax.
C)$500 gain and $175 tax.
D)$1,200 gain and $180 tax.The gain realized is $500 (100 shares × $20) less basis (100 shares × $15 exercise price) .The tax is calculated as follows: $500 × 15% (preferential rate) .

Question 56

When a CEOs 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 57

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.$11,000 (1,000 shares × $11 market price on vesting date) .

Question 58

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.The bargain element is simply the difference between the market price on the exercise date and the strike price.

Question 59

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

A)Provide risk and incentives to employees.
B)Motivate employees by aligning employee and employer incentives.
C)Avoid compensation limits for executives.
D)Provides a low or no cost form of compensation.Employers have to repurchase shares or dilute ownership (incurring opportunity costs) to provide equity-based compensation.

Question 60

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 is no effective tax planning elections for restricted stock.Employees are taxed on the fair market value of the restricted stock.

Question 61

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.Employees may exclude up to $5,000 of dependent care expenses.

Question 62

Kevin is the financial manager of Levingston BMW.The shop allows employees to purchase up to two vehicles at a discount.This year Kevin purchased a 530 model and a new M3. If the average gross profit percentage of the shop's goods is 12%,what amount must Kevin include in income?

A)$0
B)$1,640
C)$3,000
D)$17,000

Question 63

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)Complementary 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.The service must be provided at no additional cost by the employer.

Question 64

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)$0.
B)$1,250.
C)$3,750.
D)$5,000.The after-tax benefit is the $5,000 benefit less the $1,250 ($5,000 × 25 percent) of tax.

Question 65

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 its marginal tax rate is 35 percent?

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

Question 66

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.$8,000 (1,000 shares × $8 market price on grant date) .

Question 67

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 doesn't exceed the average gross profit percentage of the employer's goods.
C)The discount can be elected up to five times annually.
D)The employer's actual price for the good sold is irrelevant.There is no limitation on the number of times the employees can use the discount.

Question 68

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

A)No additional cost service.
B)Qualified employee discount.
C)Qualified transportation fringe.
D)Employee educational assistance.See Exhibit 12-13.

Question 69

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 cash elected is treated at taxable compensation.
D)All of these are true statements.See discussion in text.

Question 70

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

A)The fair market value of the rent of an apartment manager living on the premises.
B)An overtime meal provided to an employee while working late.
C)A meal provided by a hospital to residents during their shift.
D)A company picnic.The value of a company picnic is a nontaxable fringe benefit,but it is not a "for the convenience of the employer" benefit.

Question 71

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)$200 of monthly employer provided parking.
D)Automobile allowance.Employer provided parking is nontaxable up to $245 per month.

Question 72

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?

A)$0.
B)$15.00.
C)$22.00.
D)$58.33.$200,000 policy less $50,000 exemption times 10 cents per month per thousand of coverage.

Question 73

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 by the shop for $225,and sold to Francis for $250.If the average gross profit percentage of the shop's goods is 20%,what amount of the discount must be included in Francis' income?

A)$0
B)$25
C)$60
D)Some other amount.Because the discount was less than the average gross profit percentage of the shop's goods,and above cost,there is no income inclusion.

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.Only $50,000 of group-term life insurance qualifies as a nontaxable fringe benefit.

Question 75

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 2013,Tanya selected $3,000 of parking,$2,000 in 401(k) contributions,and $1,000 of cash.How much must Tanya include in taxable income?

A)$60.
B)$1,000.
C)$1,060.
D)$4,000.$1,060 is includable: $60 of parking benefits [$3,000 - ($245 excludable amount × 12) ] and $1,000 of cash.

Question 76

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.An annual benefit of $5,250 can be excluded.

Question 77

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 the maximum amount of before-tax salary Lara would give up to receive health insurance?

A)$1,500.
B)$5,000.
C)$7,143.
D)$8,333.$5,000/(1 - .3) .

Question 78

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.Employers may not discriminate with respect to dependent care expenses.