Test bank taxation of individuals and business entities 2015 6e by brian c spilker chap012

TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 12-01 Discuss and explain the tax implications of comp

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Chapter 12 Compensation

True / False Questions

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

True False

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

True False

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 True False

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

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10 One primary purpose of equity compensation is to motivate employees

21 A section 83(b) election freezes the value of restricted stock for compensation

purposes on the vesting date

True False

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

26 Employers cannot discriminate between highly and non-highly compensated

employees when providing taxable fringe benefits

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

37 Flexible spending accounts allow employees to set aside before-tax dollars for

medical and dependent care expenses

True False

Multiple 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?

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

A Taxable wages, tips, and

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 2½ months of year end are included in employee's

compensation in the year they were earned

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

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

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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

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

A Determines an employee's income tax

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

A Provide risk and incentives to

48 Which of the following is true regarding stock options?

A A loss is realized when stock options

D The bargain element on a nonqualified option is taxed to employees at

capital gain rates

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

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?

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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?

marginal tax rate is 35 percent?

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

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

A Strike price and market price on exercise

56 Which of the following statements regarding restricted stock is false?

A Like stock options, restricted stock has to vest before it can

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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?

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?

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

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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 vestedthree 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?

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

A Personal use of corporate

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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?

$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

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

A Monthly employer provided transit benefit

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

A Free tax return preparation from a

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

A The discount relates to goods or services of the

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72 Kevin is the financial manager of Levingston BMW The shop allows employees to purchase up to two vehicles at a discount Levingston's average gross profit

percentage is 15% This year Kevin purchased a 530 model and a new M3

What amount must Kevin include in income?

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

A Up to $5,000 of reimbursed expenses can

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 yearold son How much, if any, is includible in her income?

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75 Which of the following statements concerning cafeteria plans is true?

A Allows employees to choose from a menu of fringe benefits or to

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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?

after-80 Big Bucks paid its CEO $1,500,000 of compensation for the year What is the after-taxcost of paying the salary assuming a 30 percent marginal tax rate?

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81 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 heroptions How much cash will Hazel need on the exercise date?

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 heroptions 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?

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 when the stock price was $14 per share Now that the share price is $20 per share, she intends to exercise all of heroptions 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?

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84 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?

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

$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?

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87 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?

88 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?

89 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?

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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?

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 the amount of Rick's income inclusion and tax liability at the time of the income inclusion?

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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?

93 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?

94 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)

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95 Brandy graduated from Vanderbilt with her bachelor's degree recently 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?

96 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 Her employer's average gross profit percentage is 25 percent Each piece was 20 percent off of normal retail prices and in all cases the employee price exceeded the

employer's cost What amount of the discount must be included in Frederique's income?

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

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

98 Annika's employer provides only its executives with parking benefits The fair market value of the annual parking benefit is $4,800 What is the amount Annika must include into income with respect to her parking benefit in 2014?

99 Annika's employer provides each employee with up to $200 of monthly vouchers for public transportation What is the amount that Annika must include into income with respect to her benefit in 2014?

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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 2014, Corinneselected $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?

101

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?

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) 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 tax cost to Lina's employer to provide her with health insurance?

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after-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 Accessibility: Keyboard Navigation

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 Topic: Salary and wages

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

FALSE

Employees use Form W-4 to specify their withholding amounts

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 2½ months after the employer's year-end

TRUE

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

Level of Difficulty: 2 Medium Topic: Salary and wages

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

TRUE

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

TRUE

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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 Topic: Equity-based compensation

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

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

Level of Difficulty: 2 Medium Topic: Equity-based compensation

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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

AACSB: Reflective Thinking

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18 The use of restricted stock is rising relative to the use of 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

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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 Topic: Fringe benefits

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

Level of Difficulty: 1 Easy Topic: Fringe benefits

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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

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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 withoutincurring 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

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