Chapter 12 Student: ___________________________________________________________________________ 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. 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 False 8. Employer's 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 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
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. 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 False
8. Employer's 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 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
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 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, t-shirts, or a Thanksgiving
turkey. True False
35. For 2012, up to $230 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
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 I-9.B. Form W-2.C. Form W-4.D. Form 1099.
39. Which of the following items is not included on an employee's Form W-2?
A. Taxable wages, tips, and compensationB. Social Security withholdingC. Value of stock options granted during the yearD. 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.
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 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.
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, isB. is, is notC. is not, isD. is not, is not
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. $500.C. $700.D. $1,000.
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 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.
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 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.
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.
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.
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. 57. Tom recently received 2,000 shares of restricted stock from his employer, Independence Corporation,
when the share price was $10 per share. Rick's restricted shares vested three years later when the market price was $14. Rick 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.
58. Tom recently received 2,000 shares of restricted stock from his employer, Independence Corporation,
when the share price was $10 per share. Rick's restricted shares vested three years later when the market price was $14. Rick 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.
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.
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.
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 employer provided parking.D. Automobile allowance.
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.
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? (ADD TABLE) A. $0.B. $15.00.C. $22.00.D. $58.33.
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 employers 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. $0B. $3,900C. $4,198D. $6,000
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.
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 doesn't exceed 20 percent of fair market value.C. The discount can be elected up to five times annually.D. The employee price is not below employer's cost.
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, purchased for $225, and sold to Francis for $250. What amount of the discount must be included in Francis' income? A. $0.B. $25.C. $50.D. Some other amount.
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.
What amount must Kevin include in income? A. $3,000B. $17,000C. $18,000D. $25,000
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. $1,000.C. $3,000.D. $6,000.
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 2012, 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. $0.B. $1,000.C. $1,120.D. $4,000.
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.
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.
79. Ralph estimates that his 2012 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?
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)?
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?
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 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?
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?
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 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?
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 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?
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 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?
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 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?
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 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?
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 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?
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?
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?
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?
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?
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?
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)
96. 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?
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 cost. What amount of the discount must be included in Frederique's income?
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.
What amount must Jane include in income?
99. 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 2012?
100.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 2012?
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 2012, 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?
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?
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?
37. TRUE 38. C 39. C 40. D 41. B 42. C 43. B 44. D 45. D 46. B 47. D 48. B 49. A 50. D 51. B 52. B 53. C 54. B 55. C 56. B 57. D 58. D 59. D 60. D 61. C 62. C 63. C 64. B 65. B 66. D 67. B 68. C 69. A 70. C 71. A 72. A 73. B 74. B
75. D 76. C 77. C 78. C 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).79. $555.56.
Feedback: $200,000 - $60,000 ($200,000 x 30%).80. $140,000.
Feedback: See calculation below:81. $1,200,000.
Feedback: 20 options x 10 shares x $7 exercise price.82. $1,400.
Feedback: The bargain element ($2,600) is income [20 options x 10 shares x ($20 market price - $7 exercise price)]. The tax is calculated as follows: $2,600 x 25%.83. $2,600 and $650.
Feedback: The gain realized is $5,000 (200 shares x $25) less basis $4,000 (200 shares x $20 exercise price). The tax is calculated as follows: $1,000 x 15% (preferential rate).84. $1,000 and $150.
Feedback: 20 options x 20 shares x $12 exercise price.85. $4,800.
Feedback: The gain realized is $7,200; $12,000 realized (400 shares x $30) less basis $4,800 (400 shares x $12 exercise price). The tax is calculated as follows: $7,200 x 15% (preferential rate).86. $7,200 and $1,080.
Feedback: The gain realized is $7,200; $12,000 realized (400 shares x $30) less basis $4,800 (400 shares x $12 exercise price). The tax is calculated as follows: $7,200 x 35% (because she didn't meet the two year holding period).87. $7,200 and $2,520.
Feedback: The after-tax proceeds is the sales proceeds $6,000 (300 shares x $20) less cash needed to exercise and taxes is $3,000 (300 shares x $10 strike price) less taxes of $900 ($3,000 x 30 percent).88. $2,100.
Feedback: The deduction is equal to the bargain element ($6,000) is income [20 options x 30 shares x ($18 market price - $8 exercise price)]. The tax is calculated as follows: $6,000 x 30%.89. $6,000 deduction and $1,800 in tax savings.
Feedback: $6,000 (500 shares x $12 market price on vesting date) and $1,800 tax ($6,000 x 30 percent).90. $6,000 and $1,800.
Feedback: $1,500 [500 shares x ($15 market price on sale date - $12 market price on vesting date)] and $225 tax ($1,500 x 15 percent).91. $1,500 and $225.
Feedback: 500 shares x $5 (market value at grant date because of section 83(b) election. $2,500 x 30 percent is tax.92. $2,500 and $750.
Feedback: $5,000 [500 shares x ($15 market price on sale date - $5 market price on grant date)] and $750 tax ($5,000 x 15 percent).93. $5,000 and $750.
Feedback: The after-tax benefit is the $10,000 benefit less the $3,000 ($10,000 x 30 percent) of tax.94. $7,000.
Feedback: $200,000 policy less $50,000 exemption times 6 cents per month per thousand of coverage.95. $9 per month.
Feedback: Up to $5,250 of tuition benefits can be excluded from income.96. $2,750.
Feedback: Because the discount was less than 20 percent, but above the employer's cost, there is no income inclusion.97. $0.
Feedback: $160 for the irons [($1,200 x 80) percent - $800], $30 for the driver [($600 x 80) percent - $450], and $5 for the balls ($75 - $70).98. $195.
Feedback: $4,800 benefit less the $2,880 ($240 x 12).99. $1,920.
Feedback: $2,400 benefit less the $1,500 ($125 x 12). Employees can exclude up to $125 per month of transportation benefits.100. $900.
Feedback: Employees can exclude up to $5,000 of dependent care benefits, so the additional $500 is taxable and cash is always taxable.101. $1,500.
Feedback: $8,000/(1 - .35).102. $12,308.
Feedback: $6,000 x (1 - .3).103. $4,200.
Chapter 12 Summary Category # of Questions
AACSB: Analytic 34
AACSB: Reflective thinking 103
AICPA BB: Critical thinking 103
Blooms: Apply 31
Blooms: Remember 46
Blooms: Understand 26
Learning Objective: 12-01 Discuss and explain the tax implications of compensation in the form of salary and wages from the employees and employers perspectives.
19
Learning Objective: 12-02 Describe and distinguish the tax implications of various forms of equity-based compensation from the employers and employees perspectives.
40
Learning Objective: 12-03 Compare and contrast taxable and nontaxable fringe benefits and explain the employee and employer tax consequences associated with fringe benefits.
