TBChap012

12-1 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution

in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Chapter 12

Compensation

Chapter 12 Compensation Answer Key

True / False Questions

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

AACSB: Reflective Thinking AICPA BB: Critical Thinking

Blooms: Remember Learning Objective: 12-01 Discuss and explain the tax implications of compensation in the form of salary and wages from the

employee's and employer's perspectives. Level of Difficulty: 1 Easy

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

Employees use Form W-4 to specify their withholding amounts.




12-2 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution


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




4. 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 2 months after the employer's year-end. TRUE


Blooms: Understand Learning Objective: 12-01 Discuss and explain the tax implications of compensation in the form of salary and wages from the

employee's and employer's perspectives. Level of Difficulty: 2 Medium

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




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. FALSE






7. 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. TRUE




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




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

Compensation must be reasonable to be deducted.




10. One primary purpose of equity compensation is to motivate employees. TRUE


Blooms: Remember



Learning Objective: 12-02 Describe and distinguish the tax implications of various forms of equity-based compensation from the employer's and employee's perspectives.

Level of Difficulty: 1 Easy

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

The grant date is the date employees are initially allocated stock options.


Blooms: Remember Learning Objective: 12-02 Describe and distinguish the tax implications of various forms of equity-based compensation from

the employer's and employee's perspectives. Level of Difficulty: 1 Easy

12. Stock options will always provide employees with future compensation. FALSE


Blooms: Understand Learning Objective: 12-02 Describe and distinguish the tax implications of various forms of equity-based compensation from

the employer's and employee's perspectives. Level of Difficulty: 2 Medium

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




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






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




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




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




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






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

Income for restricted stock is typically measured on the vesting date.




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




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

The 83(b) election values the restricted stock on the grant date instead of the vesting date.






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


Blooms: Understand Learning Objective: 12-03 Compare and contrast taxable and nontaxable fringe benefits and explain the employee and

employer tax consequences associated with fringe benefits. Level of Difficulty: 2 Medium

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




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




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


Blooms: Remember Learning Objective: 12-03 Compare and contrast taxable and nontaxable fringe benefits and explain the employee and

employer tax consequences associated with fringe benefits. Level of Difficulty: 1 Easy



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




27. Health insurance is an example of a nontaxable fringe benefit. TRUE




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




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






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

The limit is $5,000.




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




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




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






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




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




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




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






Mult iple Choice Questions

38. 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.




39. 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

Stock options are reported as taxable compensation typically upon vesting.






40. 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 2 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.




41. 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.






42. 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.

AACSB: Analytic




43. 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.

AACSB: Analytic






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.




45. 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.






46. 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

Section 162(m) limits an employee's salary to $1,000,000.




47. 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.






48. 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.




49. 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.






50. 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).

AACSB: Analytic


Blooms: Apply Learning Objective: 12-02 Describe and distinguish the tax implications of various forms of equity-based compensation from


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. $0.

B. $700.

C. $900.

D. $1,500.

E. None of these.

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

AACSB: Analytic



the employer's and employee's perspectives.



Level of Difficulty: 2 Medium

52. 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).

AACSB: Analytic




53. 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.






54. 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.




55. 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 exercisewhich is equal to the market price on the exercise date less the strike price.

AACSB: Analytic






56. 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.




57. 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).

AACSB: Analytic






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 $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

$4,000 loss is $24,000 (2,000 shares $12 market value on sale date) of sales proceeds less $28,000 (2,000 shares $14 market price on vesting date) basis.

AACSB: Analytic




59. 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.

AACSB: Analytic


Blooms: Apply Learning Objective: 12-03 Compare and contrast taxable and nontaxable fringe benefits and explain the employee and




60. 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).

AACSB: Analytic




61. 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).

AACSB: Analytic






62. 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.




63. 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.

AACSB: Analytic






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?

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.






65. 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.




66. 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.






67. 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

The after-tax cost is the $6,000 outflow less the $2,100 ($6,000 35 percent) of income tax

benefit.

AACSB: Analytic




68. 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.






69. 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.




70. 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.






71. 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.

AACSB: Analytic






72. 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

Because both cars are sold below the average gross profit percentage of the shop's goods

dealer cost, Kevin must take $1,640 into income. This is $1,440 on the 530, which is the $9,000 discount less the $7,560 ($63,000 .12); and $200 on the M3, which is the $8,000 discount less the $7,800 ($65,000 .12).

AACSB: Analytic




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.

Employers may not discriminate with respect to dependent care expenses.


Blooms: Remember



Learning Objective: 12-03 Compare and contrast taxable and nontaxable fringe benefits and explain the employee and employer tax consequences associated with fringe benefits.

Level of Difficulty: 1 Easy

74. 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.




75. 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.






76. 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.




77. 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.






78. 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).




Essay Questions

79. Ralph estimates that his current year income tax liability will be $28,000. During the first 3 months of the year, he had $5,000 withheld. Based on his current W-4, his employer indicated

that $18,000 more will be withheld during the remainder of the year. Assuming Ralph wants to meet his estimated liability exactly, how much additional should he have withheld each month?

$555.56 Feedback: The additional amount needed to be withheld is $5,000 ($28,000 estimated liability - $5,000 current withholding - $18,000 expected withholding). The monthly amount is $555.56 ($5,000/9 months).

AACSB: Analytic




Blooms: Apply Learning Objective: 12-01 Discuss and explain the tax implications of compensation in the form of salary and wages from the


80. 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)?

$140,000. Feedback: $200,000 - $60,000 ($200,000 30%).

AACSB: Analytic




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

$1,200,000 Feedback: See calculation below:

AACSB: Analytic



employee's and employer's perspectives.



Level of Difficulty: 3 Hard

82. Hazel received 20 NQOs (each option gives her the right to purchase 10 shares of stock for $7 per share) at the time she started working when the stock price was $14 per share. Now that the share price is $20 per share, she intends to exercise all of her options. How much cash will Hazel need on the exercise date?

$1,400. Feedback: 20 options 10 shares $7 exercise price.

AACSB: Analytic




83. Hazel received 20 NQOs (each option gives her the right to purchase 10 shares of stock for $7 per share) at the time she started working the stock price was $14 per share. Now that the share price is $20 per share, she intends to exercise all of her options. How much income will Hazel recognize on the exercise date and how much tax will she pay assuming her marginal

tax rate is 25 percent?

$2,600 and $650. Feedback: The bargain element ($2,600) is income [20 options 10 shares ($20 market price - $7 exercise price)]. The tax is calculated as follows: $2,600 25%.

AACSB: Analytic






84. Hazel received 20 NQOs (each option gives her the right to purchase 10 shares of stock for $7 per share) at the time she started working when the stock price was $14 per share. Now that the share price is $20 per share, she intends to exercise all of her options. If Hazel holds the shares for two years and sells them when the market price is $25, how much gain will Hazel

recognize on the sale and how much tax will she pay assuming her marginal tax rate is 25 percent?

$1,000 and $150. Feedback: The gain realized is $5,000 (200 shares $25) less basis $4,000 (200 shares

$20 exercise price). The tax is calculated as follows: $1,000 15% (preferential rate).

AACSB: Analytic




85. Suzanne received 20 ISOs (each option gives her the right to purchase 20 shares of stock for $12 per share) at the time she started working when the stock price was $14 per share. Three years later, when the share price was $23 per share, she exercised all of her options. How much cash will Suzanne need on the exercise date?

$4,800. Feedback: 20 options 20 shares $12 exercise price.

AACSB: Analytic






86. Suzanne received 20 ISOs (each option gives her the right to purchase 20 shares of stock for $12 per share) at the time she started working when the stock price was $13 per share. Three years later, when the share price was $23 per share, she exercised all of her options. If Suzanne holds the shares for two additional years and sells them when the market price is

$30, how much gain will Suzanne recognize on the sale and how much tax will she pay assuming her marginal tax rate is 35 percent?

$7,200 and $1,080. Feedback: The gain realized is $7,200; $12,000 realized (400 shares $30) less basis $4,800

(400 shares $12 exercise price). The tax is calculated as follows: $7,200 15% (preferential rate).

AACSB: Analytic




87. Suzanne received 20 ISOs (each option gives her the right to purchase 20 shares of stock for $12 per share) at the time she started working when the stock price was $13 per share. Three years later, when the share price was $23 per share, she exercised all of her options. If Suzanne holds the shares for one additional year and sells them when the market price is $30,

how much gain will Suzanne recognize on the sale and how much tax will she pay assuming her marginal tax rate is 35 percent?

$7,200 and $2,520. Feedback: The gain realized is $7,200; $12,000 realized (400 shares $30) less basis $4,800

(400 shares $12 exercise price). The tax is calculated as follows: $7,200 35% (because she didn't meet the two year holding period).

AACSB: Analytic






88. Raja received 20 NQOs (each option gives him the right to purchase 15 shares of stock for $10 per share) from his employer at the time he started working when the stock price was $11 per share. Now that the share price is $20 per share, he intends to exercise all of the options

using a same-day sale. What are Raja's after-tax proceeds from the sale if his marginal tax rate is 30 percent?

$2,100. Feedback: The after-tax proceeds are the sales proceeds $6,000 (300 shares $20) less cash needed to exercise and taxes: $3,000 (300 shares $10 strike price) less taxes of $900

($3,000 30 percent).

AACSB: Analytic



the employer's and employee's perspectives. Level of Difficulty: 3 Hard

89. Kaijsa received 20 NQOs (each option gives her the right to purchase 30 shares of stock for $8 per share) from her employer at the time she started working when the stock price was $9 per share. Now that the share price is $18 per share, she intends to exercise all of her options. If Kaijsa holds the shares for two years and sells them when the market price is $25, what is

the amount of the deduction and tax savings her employer will receive (assume the employer's marginal tax rate is 30 percent?

$6,000 deduction and $1,800 in tax savings. Feedback: The deduction is equal to the bargain element ($6,000) is income [20 options 30 shares ($18 market price - $8 exercise price)]. The tax is calculated as follows: $6,000

30%.

AACSB: Analytic






90. Rick recently received 500 shares of restricted stock from his employer, Crazy Corporation, when the share price was $5 per share. Rick's restricted shares vested three years later when the market price was $12. Rick held the shares for a little more than a year and sold them when the market price was $15. What is the amount of Rick's income on the vesting date? Assuming a marginal tax rate of 30 percent, what is Rick's tax on the restricted stock?

$6,000 and $1,800. Feedback: $6,000 (500 shares $12 market price on vesting date) and $1,800 tax ($6,000 30 percent).

AACSB: Analytic




91. Rick recently received 500 shares of restricted stock from his employer, Crazy Corporation, when the share price was $5 per share. Rick's restricted shares vested three years later when

the market price was $12. Rick held the shares for a little more than a year and sold them when the market price was $15. What is the amount of Rick's income on the sale of the stock? Assuming a marginal tax rate of 30 percent, what is Rick's tax on the sale of the stock?

$1,500 and $225. Feedback: $1,500 [500 shares ($15 market price on sale date - $12 market price on vesting date)] and $225 tax ($1,500 15 percent).

AACSB: Analytic






92. Rick recently received 500 shares of restricted stock from his employer, Crazy Corporation, when the share price was $5 per share. Rick's restricted shares vested three years later when the market price was $12. Rick held the shares for a little more than a year after vesting and

sold them when the market price was $15. What is the amount of Rick's compensation income if Rick made an election under section 83(b) when the stock was granted? Assuming a marginal tax rate of 30 percent, what is amount of Rick's income inclusion and tax liability at the time of the income inclusion?

$2,500 and $750 Feedback: 500 shares $5 (market value at grant date because of section 83(b) election. $2,500 30 percent is tax.

AACSB: Analytic




93. Rick recently received 500 shares of restricted stock from his employer, Crazy Corporation, when the share price was $5 per share. Rick's restricted shares vested three years later when the market price was $12. Rick held the shares for a little more than a year after vesting and

sold them when the market price was $15. Assuming that Rick made an election under section 83(b) when the stock was granted, what is the amount of Rick's income inclusion and tax liability upon the sale of the stock?

$5,000 and $750. Feedback: $5,000 [500 shares ($15 market price on sale date - $5 market price on grant

date)] and $750 tax ($5,000 15 percent).

AACSB: Analytic






94. Kimberly's employer provides her with a personal travel allowance of $10,000 annually. Her marginal tax rate is 30 percent. Her employer has a marginal tax rate of 35 percent. What is Kimberly's after-tax benefit, ignoring payroll taxes?

$7,000. Feedback: The after-tax benefit is the $10,000 benefit less the $3,000 ($10,000 30 percent) of tax.




95. Hope'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 Hope's employer $700 to provide this amount of insurance to Hope each year. Assuming that Hope is 27 years old, use the table to determine the monthly premium that Hope must include in income as a result of receiving the group-term life benefit? (ADD TABLE)

$9 per month. Feedback: $200,000 policy less $50,000 exemption times 6 cents per month per thousand of coverage.

AACSB: Analytic






96. Brandy recently graduated from Vanderbilt with her bachelor's degree. She works for Walton & Company CPAs. The firm pays her tuition ($8,000 per year) for her so that she can receive her MBA. How much of the $8,000 tuition benefit does Brandy need to include in her income?

$2,750. Feedback: Up to $5,250 of tuition benefits can be excluded from income.

AACSB: Analytic




97. Frederique works for a furniture retailer. The shop allows all employees to purchase 10 pieces of furniture per year at a discount. This year Frederique purchased eight pieces. She gave three pieces as a gift to her brother as a wedding present. Each piece was 20 percent off of normal retail prices and in all cases the employee price exceeded the employer's average

gross profit percentage. What amount of the discount must be included in Frederique's income?

$0 Feedback: Because the discount was less than employer's average gross profit percentage

there is no income inclusion.

AACSB: Analytic






98. Jane is an employee of Rohrs Golf Emporium. The shop allows employees to purchase equipment at significant discount. This year Jane purchased several new items to improve her game.

If the employer's average gross profit percentage is 30%, what amount must Jane include in income?

$160 Feedback: $140 for the irons [$500 - $360 ($1,200 .3)] and $20 for the driver [$200 - $180 ($600 .3)].

AACSB: Analytic




99. Annika's employer provides only its executives with parking benefits. The fair market value of the annual parking benefit is $4,800. What amount must Annika include in her income with respect to her parking benefit in 2013?

$1,860. Feedback: $4,800 benefit less the $2,940 ($245 12).






100. Annika's employer provides each employee with up to $200 of monthly vouchers for public transportation. What amount must Annika include in her income with respect to her benefit in

2013?

$0 Feedback: $2,400 benefit less the $2,940 ($245 12). Employees can exclude up to $245 per month of transportation benefits.




101. Corinne's employer offers a cafeteria plan that allows employees to choose among a number of benefits. Each employee is allowed $12,000 in benefits. For the current year, Corinne selected $4,500 of health insurance, $5,500 of dependent care, $1,000 in 401(k) contributions,

and $1,000 of cash. How much must Corinne include in taxable income?

$1,500 Feedback: Employees can exclude up to $5,000 of dependent care benefits, so the additional $500 is taxable and cash is always taxable.






102. Lina, a single taxpayer with a 35 percent marginal tax rate, desires health insurance. The health insurance would cost Lina $8,000 to purchase if she pays for it herself (Lina's AGI is too high to receive any tax deduction for the insurance as a medical expense). Lina's employer has a 30 percent marginal tax rate. What is the maximum amount of before-tax salary Lina

would give up to receive health insurance?

$12,308 Feedback: $8,000/(1 - .35).




103. Lina, a single taxpayer with a 35 percent marginal tax rate, desires health insurance. The health insurance would cost Lina $8,000 to purchase if she pays for it herself (Lina's AGI is too high to receive any tax deduction for the insurance as a medical expense). Because of group discounts, her employer can purchase the insurance for $6,000. Lina's employer has a 30

percent marginal tax rate. What would be the after-tax cost to Lina's employer to provide her with health insurance?

$4,200 Feedback: $6,000 (1 - .3).




TBChap012

Documents

form of salary

critical thinking blooms

reflective thinking

employers perspectives

false employees

compensation chapter

learning objective

employees income tax