Question 1

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.

Accepted Answer

The $1,000,000 limit on covered employees for publicly traded companies applies only to the CEO, CFO, three other highest compensated officers, and includes all covered employees from previous years. This means once an employee is considered a covered employee subject to the limit, they remain so in subsequent years.

Question 2

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.

Accepted Answer

The answer of Maren received 10 NQOs (each option gives...

Question 3

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.

Accepted Answer

The answer of Which of the following statements regarding restricted...

Question 4

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.

Accepted Answer

The form can be adjusted at any point during the year if the employee's personal or financial situation changes. The statement "The form can only be adjusted at the beginning of the year or start of employment" is incorrect. Employees can adjust their W-4 at any time during the year if their personal or financial situation changes.

Question 5

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

Accepted Answer

The answer of Bad Brad received 20 NQOs (each option...

Question 6

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

Accepted Answer

The strike price and market price on grant date are not needed because same-day sale means the sale is happening on the same day as the exercise date. Therefore, the grant date information is irrelevant. The other options are needed, as the market price on the sale date and tax rate are needed to calculate the after-tax proceeds, and the market price on the exercise date and the strike price are needed to calculate the profit or gain from exercising the option. The strike price and market price on grant date are not needed to calculate the after-tax proceeds of a same-day sale. These values are only needed to calculate the taxable value of the option at the time of exercise. The market price on sale date and the marginal tax rate are needed to calculate the after-tax proceeds. The market price on exercise date is also needed to calculate the taxable value of the option.

Question 7

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.

Accepted Answer

The answer of Maren received 11 NQOs (each option gives...

Question 8

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

Accepted Answer

Aharon exercises 10 options, which means he has the right to buy 100 shares (10 shares per option x 10 options).
For each share, the strike price is $10 and the market price is $15 on the exercise date.
So Aharon will need to pay the market price of $15 for each share, which means he will need to pay:
$15 x 100 shares = $1,500 total cost to purchase the options
Therefore, the answer is D. $1,000 is not an option.

Question 9

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.

Accepted Answer

Typically, there is no tax effect for the recipient of stock options on the grant date. The tax implications usually occur at the time of exercise or sale of the acquired shares, depending on the type of option (incentive stock options vs. nonqualified stock options).

Question 10

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

Accepted Answer

The grant date refers to the date on which stock options are awarded to an employee. This is the date on which the employee is granted the right to purchase a certain amount of company stock at a specified price (the exercise price) within a certain period of time. The exercise date is the date on which the employee actually purchases the stock option. The lapse date refers to the date on which the stock option expires if it has not been exercised. The vesting date is the date on which the employee's right to exercise the stock option becomes unconditional. Grant date refers to the when the stock option is awarded to an employee, specifying the number of shares and the price at which they may be purchased. Exercise date is the day the employee chooses to buy the shares. Lapse date is the date when the option expires. Vesting date is the date when an employee gains ownership of the granted stock options.

Question 11

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

Accepted Answer

The answer of Maren received 12 NQOs (each option gives...

Question 12

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

Accepted Answer

The answer of Stevie recently received 1,000 shares of restricted...

Question 13

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

Accepted Answer

The answer of Maren received 10 NQOs (each option gives...

Question 14

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

Accepted Answer

If a CEO's salary exceeds $1,000,000, the employee is only able to deduct up to $1,000,000 of their salary from their taxable income under the Internal Revenue Code's limitation on deduction of executive compensation. This means that the remaining amount over $1,000,000 is not deductible for the employee and is subject to being taxed. However, the employer is still allowed to deduct the entire amount of CEO salary, regardless of whether it exceeds $1,000,000 or not. According to Section 162(m) of the Internal Revenue Code, when a CEO's salary exceeds $1,000,000, the employer is not allowed a deduction on the portion of the salary that exceeds $1,000,000. However, the employee is still taxed on the entire amount of their salary. Therefore, the correct choice is B) is; is not.

Question 15

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

Accepted Answer

On the vesting date, the value of Tom's shares is calculated by multiplying the number of shares (2,000) by the market price at vesting ($14). This gives a total value of $28,000, which represents the income Tom would recognize at the time of vesting, as the shares are considered compensation for services rendered.

Question 16

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

Accepted Answer

The answer of Tom recently received 2,000 shares of restricted...

Question 17

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

Accepted Answer

The answer of Tom recently received 2,110 shares of restricted...

Question 18

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

Accepted Answer

Equity-based compensation, such as stock options or restricted stock units, does have a cost to the company, including dilution of existing shareholders and potential impact on the company's financial statements. It is not considered a low- or no-cost form of compensation.

Question 19

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

Accepted Answer

The bargain element is the difference between the market price of the stock on the exercise date and the strike price of the option. This is because the employee can purchase the stock at the lower strike price and then sell it at the higher market price, resulting in a profit equal to the bargain element. Therefore, the answer is C, the difference between the market price on the exercise date and the strike price. The bargain element is calculated as the difference between the market price on the exercise date and the strike price. This represents the discount that the employee received by being able to purchase the stock at a lower price than the current market value. Options are typically exercised when the market price is higher than the strike price, resulting in a positive bargain element.

Question 20

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.

Accepted Answer

This statement is false as there is no limitation on the loss an employee can incur if they leave before the vesting date. The other statements are true: 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. The statement regarding any loss being limited to $3,000 if an employee leaves before the vesting date is false. There is no such limitation.

Quiz 12: Compensation

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

Which of the following statements regarding restricted stock is false?

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

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

Which of the following is true regarding stock options?

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

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.

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

How is the bargain element for a stock option calculated?

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