income tax ch 12

Van Winkle received stock options from his employer, RiP, Inc. The options entitled Van to purchase 100 shares of RiP common stock at an exercise price of $20 per share. The options vested when the market price of the stock was $32 per share. Van exercised his options on the vesting date. He sold the stock several months later for $38 per share. What is the total bargain element on Van's stock? Multiple choice question.

$1,200

Which of the following choices are characteristics of stock options? (Check all that apply.) Employees may choose NOT to exercise their options if the market value of the shares is below the strike price. The employee will receive the stock on the vesting date without having to pay for it. Employees may exercise their options by paying the strike price to the employer anytime between the vesting and expiration dates. If the market price is below the strike price, the employee may purchase the stock at FMV and sell it to the company for the option price. Employees may purchase the stock on the grant date, but can NOT sell their shares until the vesting date.

Employees may choose NOT to exercise their options if the market value of the shares is below the strike price. Employees may exercise their options by paying the strike price to the employer anytime between the vesting and expiration dates.

Which of the following choices is a characteristic of stock options? If the market price is below the strike price, the employee may purchase the stock at FMV and sell it to the company for the option price. Employees may exercise their options by paying the strike price to the employer anytime between the vesting and expiration dates. Employees must exercise their options on the vesting date regardless of the market price. Employees may purchase the stock on the grant date, but can NOT sell their shares until the vesting date.

Employees may exercise their options by paying the strike price to the employer anytime between the vesting and expiration dates.

Which of the following statements is INCORRECT regarding the timing of employer deductions for compensation and the employees' inclusion of compensation in gross income? When the employer and the employee are related, the employer must deduct wages expense in the same year the employee reports it as gross income. Employers using the accrual method of accounting must deduct salaries and wages in the year the employees earn the compensation. Employers using the cash method of accounting must deduct salaries and wages in the year they pay the employees. Employers must deduct the compensation the same year that the employees include the amounts in gross income regardless of the accounting method.

Employers must deduct the compensation the same year that the employees include the amounts in gross income regardless of the accounting method.

Which of the following characteristics apply to taxable fringe benefits? (Check all that apply.) Multiple select question. Employers may NOT discriminate between employees, but must offer the same taxable fringe benefits to all employees regardless of compensation level. Employers treat the taxable fringe benefits the same as cash compensation. The cost of the taxable fringe benefit is deductible to the employer, not the value of the benefit to the employee. Employees are taxed on the value of the benefit, rather than the cost paid for the benefit.

Employers treat the taxable fringe benefits the same as cash compensation. The cost of the taxable fringe benefit is deductible to the employer, not the value of the benefit to the employee. Employees are taxed on the value of the benefit, rather than the cost paid for the benefit.

Which of the following statements is correct regarding employers' treatment of salaries and wages? Employers using the accrual method of accounting must deduct salaries and wages in the year the employees earn the compensation. Employers using the cash method of accounting must deduct salaries and wages in the year the employees earn the compensation. When the employer and the employee are related parties, both parties must use the accrual method to recognize the deduction and the income. Employers must deduct the compensation the same year that the employees include the amounts in gross income regardless of the accounting method.

Employers using the accrual method of accounting must deduct salaries and wages in the year the employees earn the compensation.

Which of the following choices is NOT an advantage of equity-based compensation? If the company's stock price increases after options are granted, the employees may benefit greatly. Equity-based compensation is exempt from taxation for the employees. Equity-based compensation allows companies to reward employees without incurring cash outflows. Equity-based compensation motivates employees to take ownership in their company.

Equity-based compensation is exempt from taxation for the employees.

Which of the following fringe benefits are nontaxable fringe benefits for the recipient? (Check all that apply.) Multiple select question. Providing mass transit passes to employees who take the subway to work Cash received in lieu of other benefits included in a cafeteria plan The cost of lodging provided to an apartment manager who is required to live on the premises Reimbursement of the cost of moving household goods across the country due to a change in employment

Providing mass transit passes to employees who take the subway to work The cost of lodging provided to an apartment manager who is required to live on the premises

Which of the following choices is a characteristic of restricted stock? The employee is not required to pay for the stock but rather is given the shares on the grant date. Employees must purchase the stock on the vesting date regardless of the market price. Employees may purchase the stock on the grant date, but can NOT sell their shares until the vesting date. Employees must use cash to purchase the employer's stock once the vesting date is reached.

The employee is not required to pay for the stock but rather is given the shares on the grant date.

How are salaries and wages taxed? (Check all that apply.) Multiple select question. They are subject to FICA tax. They are taxed when received, rather than when earned. They are taxed as ordinary income. They are taxed as capital gains. They are taxed when earned, rather than when the money is received.

They are subject to FICA tax. They are taxed when received, rather than when earned. They are taxed as ordinary income.

Van Winkle received nonqualified stock options (NQOs) from his employer, RiP, Inc. The options entitled Van to purchase 100 shares of RiP common stock at an exercise price of $20 per share. The options vested when the market price of the stock was $32 per share. Van exercised his options on the vesting date. He sold the stock two years later for $48 per share. Which of the following choices is correct? Multiple choice question.

Van's gain on the sale will be a $1,600 long-term capital gain recognized on the sale date.

The difference between the exercise price and the market value of the acquired shares on the date of exercise is called the ________ ________ . (Enter only one word per blank.)

bargain element

_____-___ compensation can provide motivational effects to employees and cash flow benefits to the company.

equity based

The bargain element is taxed as ordinary income on the exercise date for ___________ stock options, but NOT for ______________ stock options unless specific required holding periods are not met.

nonqualified; incentive

The type of compensation where employees receive a fixed amount regardless of the amount of hours worked is called a(n)_______ . The type of compensation that is based on the number of hours worked is called __________. Both types of compensation are taxed at to employees as__________ income and are subject to _________ tax which includes Social Security and Medicare.

salary, wage, ordinary, FICA