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

Chapter 12
Compensation
True / False Questions
1. Current compensation is usually comprised of salary, wages, and bonuses.
True

False

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

False

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

False

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

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.
True

False

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

False

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

False

12-1
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10. One primary purpose of equity compensation is to motivate employees.

True

False

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

False

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

False

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

False

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

False

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

False

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

False

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

False

18. The use of restricted stock is rising relative to the use of stock options.
True

False

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

False

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

False

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

False

12-2
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22. Fringe benefits are generally a form of non-cash compensation.
True

False

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

False

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

False

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

True

False

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

False

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

False

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

False

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

False

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

False

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

False

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

False

12-3
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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.
True

False

34. Employees may exclude from income items such as occasional theater tickets, tshirts, or a Thanksgiving turkey.
True

False

35. For 2014, up to $300 of qualified transportation fringe benefits can be excluded from
income.
True

False

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

False

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?

A. Form I9.
B. Form W2.
C. Form W4.
D. Form
1099.

12-4

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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
compensation
B. Social Security
withholding
C. Value of stock options granted during
the year
D. Federal and state income tax
withholding
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
withholding.

C. The withholding tables vary based on filing
status.
D. Extra allowances can be claimed and reduce
withholding.
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.

12-5
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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
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.
45. Which of the following statements is true regarding the $1,000,000 limit on covered
employees?

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 and three other highest compensated
officers, not including the CFO.
46. 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

12-6
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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.
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.
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.
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. $50
0.
C. $70
0.
D. $1,00
0.

12-7
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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?

A. $0
.
B. $70
0.
C. $90
0.
D. $1,50
0.
E. None of
these.
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.
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.

12-8
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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
date.
B. Strike price and
date.
C. Market price on
exercise date.
D. Market price on
tax rate.

market price on exercise
market price on grant
sale date and market price on

sale date and marginal

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. $6,00
0.
B. $9,00
0.
C. $15,00
0.
D. $16,20
0.
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.

12-9
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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?

A. $0
.
B. $10,00
0.
C. $20,00
0.
D. $28,00
0.
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

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.

12-10
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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 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. $5,00
0.
C. $8,00
0.
D. $11,00
0.

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. $5,00
0.
C. $8,00
0.
D. $11,00
0.
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. $225 of employer provided
parking.
D. Automobile
allowance.

12-11
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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?

A. $0
.
B. $1,25
0.
C. $3,75
0.
D. $5,00
0.
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. $15.0
0.
C. $22.0
0.
D. $58.3
3.

12-12
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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.
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.
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 the employer's marginal tax rate is 35
percent?

A. $

0
B. $3,90
0
C. $4,19
8
D. $6,00
0
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.

12-13
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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
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.
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 on services doesn't exceed 20 percent of the price offered to
customers.
C. The discount can be elected up to five times
annually.
D. The employee discount on goods is not greater than employer's average
gross profit.
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 for $225, was sold to Francis for $250, and
the employer's average gross profit percentage is 30 percent. What amount of the
discount must be included in Francis' income?

A. $
0
B. $2
5
C. $4
0
D. Some other
amount.

12-14
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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?

A. $
0
B. $2,20
0
C. $3,00
0
D. $25,00
0
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.
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. $1,00
0.
C. $3,00
0.
D. $6,00
0.

12-15
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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
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.
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 2014, Tanya
selected $3,200 of parking, $2,200 in 401(k) contributions, and $800 of cash. How

much must Tanya include in taxable income?

A. $0
.
B. $1,00
0.
C. $1,12
0.
D. $4,00
0.
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.

12-16
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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?

A. $1,50
0.
B. $5,00
0.
C. $7,14
3.
D. $8,33
3.

Essay Questions
79. Leesburg paid its employee $200,000 of compensation for the year. What is the aftertax cost of paying the salary assuming a 30 percent marginal tax rate (ignore payroll
taxes)?

80. 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?

12-17
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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 her
options. 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 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?

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 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?

12-18
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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?

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 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?

12-19
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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?

12-20
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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 sale of the stock? Assuming a marginal tax rate of 30
percent, what is Rick's tax on the sale of the stock?

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 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?

12-21
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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.
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)

12-22
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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?

12-23
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McGraw-Hill Education.


97. 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 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?

12-24
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McGraw-Hill Education.

100 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, 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?

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

12-25
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McGraw-Hill Education.