Question 1

Six years ago,HOPCO granted Lin Sing an incentive stock option (ISO)to purchase 1,000 shares of HOPCO stock for $55 per share.On date of grant,the market price was $50 per share.This year,Lin Sing exercised the ISO when the market price was $64 per share.How much ordinary income does she recognize because of the exercise?

Accepted Answer

The answer of Six years ago,HOPCO granted Lin Sing an...

Question 2

In 2008,Mr.Delgado exercised an option to purchase 1,000 shares of his employer's stock for $29 per share when the market price was $65 per share.This year,Mr.Delgado sold the stock for $80 per share.Which of the following statements is false?

Accepted Answer

If the option was an ISO, Mr. Delgado had a $36,000 preference item in 2008.

Question 3

Tony's marginal income tax rate is 28%,and he pays FICA tax on his entire salary (7.65%).Tony's employer offered him a choice between $5,000 additional salary or a nontaxable fringe benefit.Tony would have to pay $3,400 to purchase the benefit directly.Which of the following statements is true?

Accepted Answer

To determine which choice is the best, we need to compare the after-tax value of the additional salary and the fringe benefit.

If Tony chooses the $5,000 additional salary, he will have to pay income tax and FICA taxes on it.

Income tax = $5,000 x 28% = $1,400

FICA tax = $5,000 x 7.65% = $383.25

Total taxes paid = $1,400 + $383.25 = $1,783.25

After-tax value of additional salary = $5,000 - $1,783.25 = $3,216.75

If Tony chooses the nontaxable fringe benefit, he will not have to pay income tax or FICA taxes on it. However, he will have to pay $3,400 to purchase it.

After-tax value of fringe benefit = value of benefit - cost of benefit

= $3,400

Therefore, the after-tax value of the fringe benefit is $3,400.

Comparing the after-tax value of the additional salary and the fringe benefit, we can see that the fringe benefit is worth $3,400, while the additional salary is worth $3,216.75.

Therefore, the best choice for Tony is to choose the fringe benefit, as it is worth $183.25 more than the additional salary.

Question 4

Four years ago,Acnex Inc.granted Ms.Cardena an incentive stock option (ISO)to purchase 1,000 shares of Acnex stock at $44 per share.On date of grant,the market price was $42 per share.This year,Ms.Cardena exercised the ISO when the market price was $75 per share.Which of the following statements is true?

Accepted Answer

When an incentive stock option (ISO) is exercised, the difference between the market price and the exercise price is not recognized as ordinary income by the employee at the time of exercise. Therefore, Ms. Cardena recognizes no ordinary income. Additionally, the company, Acnex, is not allowed a deduction for the income not recognized by Ms. Cardena.

Question 5

Mr.Sherman incurred $7,000 of employment-related business expenses.Which of the following statements is true?

Accepted Answer

The answer of Mr.Sherman incurred $7,000 of employment-related business expenses.Which...

Question 6

Which of the following statements concerning qualified retirement plans is false?

Accepted Answer

The answer of Which of the following statements concerning qualified...

Question 7

An employee receives $110,000 of group term life insurance coverage per year.The cost of this coverage to his employer is $90.The cost based on the IRS's uniform premium table is $1.08 per year per $1,000 of coverage.What amount is taxable to the employee?

Accepted Answer

First, we need to calculate the cost of $110,000 of coverage: 
$110,000 / $1,000 = 110
110 x $1.08 = $118.80 
So, the imputed income for the employee is $118.80. However, the employee is only responsible for paying tax on the cost of coverage that exceeds $50,000. 
$110,000 - $50,000 = $60,000 
$60,000 / $1,000 = 60 
60 x $1.08 = $64.80 
So, the taxable amount of coverage for the employee is $64.80.

Question 8

Which of the following statements regarding fringe benefits is false?

Accepted Answer

Employers are allowed to deduct the cost of nontaxable employee fringe benefits as a business expense.

Question 9

Six years ago,HOPCO granted Lin Sing a nonqualified option to purchase 1,000 shares of HOPCO stock at $55 per share.On date of grant,the market price was $50 per share.This year,Lin Sing exercised the option when the market price was $64 per share.How much ordinary income does Lin Sing recognize because of the exercise?

Accepted Answer

When Lin Sing exercised the option, they purchased the stock at a discounted price of $55 per share and then immediately sold it at the market price of $64 per share. Therefore, they recognize ordinary income of $9,000 (($64-$55)*1,000)).

Question 10

This year,Nilo Inc.granted nonqualified stock options to 230 employees.For financial statement purposes,Nilo recorded a $179,200 expense for the estimated value of the options.As a result of this transaction,Nilo has a:

Accepted Answer

Nonqualified stock options create a temporary unfavorable book/tax difference. This is because the book expense (recorded at fair value of the options granted) is deductible for tax purposes only when the options are exercised and the employee recognizes taxable income, which might not happen in the same period. Therefore, Nilo will record a book expense in the current period but may not realize a tax deduction until a future period, creating a temporary unfavorable book/tax difference.

Question 11

Six years ago,Linus Corporation granted Pauline a nonqualified option to purchase 5,000 shares of Linus stock for $13 per share.On date of grant,the market price was $11 per share.Last year,Pauline exercised the option when the market price was $47 per share.This year,she sold the stock for $40 per share.Compute Pauline's gain or loss recognized on sale.

Accepted Answer

The cost basis for Pauline to purchase the stock is $13 per share, which means she paid a total of $65,000 ($13 x 5,000 shares) to exercise the option. When she sold the stock for $40 per share, she received a total of $200,000 ($40 x 5,000 shares).

To calculate her gain or loss, we need to subtract the cost basis from the sales proceeds: 
$200,000 - $65,000 = $135,000

Since the resulting amount is negative, it means Pauline incurred a loss of $35,000 ($135,000 - $100,000 for sales proceeds minus the cost basis). Therefore, the correct answer is C) $35,000 loss.

Question 12

Six years ago,Linus Corporation granted Pauline an incentive stock option (ISO)to purchase 5,000 shares of Linus stock for $13 per share.On date of grant,the market price was $11 per share.Last year,Pauline exercised the ISO when the market price was $47 per share.This year,she sold the stock for $40 per share.Compute Pauline's gain or loss recognized on sale.

Accepted Answer

The answer of Six years ago,Linus Corporation granted Pauline an...

Question 13

Jason Inc.maintains a qualified profit-sharing plan for its employees.This year,Jason contributed $2,300 to Ms.Preston's profit-sharing account.Which of the following statements is true?

Accepted Answer

In a qualified profit-sharing plan, the employer can deduct contributions made to the plan, and the employee does not include these contributions in their gross income until they are distributed.

Question 14

Six years ago,HOPCO granted Ms.Cardena a nonqualified option to purchase 1,000 shares of HOPCO stock at $12 per share.On date of grant,the market price was $10 per share.This year,Ms.Cardena exercised the option when the market price was $33 per share.Compute HOPCO's deduction resulting from the exercise.

Accepted Answer

HOPCO does not receive a tax deduction for nonqualified stock options exercised by employees. Therefore, none of the answer choices are correct.

Question 15

Harold Biggs is provided with $200,000 coverage under his employer's group-term life insurance plan.Which of the following statements is true?

Accepted Answer

According to the IRS, the first $50,000 of group-term life insurance coverage provided by an employer is excluded from an employee's gross income. Any coverage beyond that amount is considered taxable income and must be reported on the employee's W-2 form. Therefore, in this case, $150,000 of Harold's coverage is included in his gross income. Option A is incorrect because $50,000 is excluded from gross income. Option C is incorrect because not all of Harold's coverage is taxable. Option D is incorrect because only $150,000 of Harold's coverage is taxable.

Question 16

Lana,an employee of Compton University,paid $1,500 for professional journal subscriptions and $1,000 of membership dues to academic organizations.These unreimbursed employment-related expenses are Lana's only miscellaneous itemized deduction.Which of the following statements is false?

Accepted Answer

Under the Tax Cuts and Jobs Act, miscellaneous itemized deductions subject to the 2% AGI floor, including unreimbursed employee expenses, are not deductible for tax years 2018 through 2025. Therefore, all the statements are false as none of the expenses are deductible regardless of AGI.

Question 17

This year,Nilo Inc.granted incentive stock options (ISO)to 230 employees.For financial statement purposes,Nilo recorded a $179,200 expense for the estimated value of the ISOs.As a result of this transaction,Nilo has a:

Accepted Answer

The answer of This year,Nilo Inc.granted incentive stock options (ISO)to...

Question 18

Mr.Wang's corporate employer transferred him from its Seattle office to its San Jose office.Mr.Wang incurred $18,000 of moving expenses to relocate his household to San Jose.Which of the following statements is true?

Accepted Answer

If an employer pays a moving allowance that is less than or equal to the actual expenses incurred by the employee, the excess amount is deductible as an above-the-line deduction on the employee's tax return. Therefore, Mr. Wang can deduct the $3,000 excess of his actual moving expenses over the $15,000 moving allowance as an above-the-line deduction.

Question 19

Eight years ago,Acnex Inc.granted Ms.Cardena a nonqualified option to purchase 1,000 shares of Acnex stock at $44 per share.On date of grant,the market price was $42 per share.This year,Ms.Cardena exercised the option when the market price was $75 per share.Which of the following statements is true?

Accepted Answer

Ms. Cardena recognizes $31,000 of ordinary income, which is the difference between the market price at the time of exercise ($75) and the exercise price ($44), multiplied by the number of shares (1,000). Acnex is allowed a corresponding $31,000 deduction for the same reason.

Question 20

Lawrence is a U.S.citizen who has worked in his employer's Paris office for the past five years.Compute Lawrence's 2017 AGI if his only item of income was his $130,000 salary.

Accepted Answer

Lawrence can exclude up to $102,100 of foreign earned income from his AGI in 2017, leaving $27,900 taxable.

Quiz 15: Compensation and Retirement Planning