Ch. 12 Quiz

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's income?

$0 Explanation Because the discount was less than the employer's average gross profit percentage, there is no income inclusion.

Which of the following statements regarding compensation is false?

Bonuses paid within two and a half months of year-end are included in employee's compensation in the year they were earned. Explanation Employees include bonuses as part of compensation in the year received.

Which of the following forms is used to determine income tax withholding for an employment relationship?

Form W-4 Explanation Employees fill out a W-4 and provide it to their employer to determine tax withholding.

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

Free tax return preparation from a client Explanation The service must be provided by the employer at no additional cost.

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

Grant date Explanation The grant date is the date on which an employee receives the stock options.

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

Group-term life insurance policy providing $100,000 of coverage Explanation Only $50,000 of group-term life insurance qualifies as a nontaxable fringe benefit.

Which of the following is false regarding an 83(b) election?

If an employee leaves before the vesting date, any loss is limited to $3,000. Explanation Employees are not allowed to deduct a loss if restricted stock subject to a section 83(b) election is forfeited.

Which of the following isn't reported on the Form W-2?

Indication as to whether an employee had more than one employer during the year Explanation The W-2 only provides information about the employer providing the statement.

How is the bargain element for a stock option calculated?

The difference between the market price on the exercise date and the strike price Explanation The bargain element is simply the difference between the market price on the exercise date and the strike price.

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

The discount can be elected up to five times annually. Explanation There is no limitation on the number of times the employees can use the discount.

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

The form can only be adjusted at the beginning of the year or start of employment. Explanation Employees may adjust the Form W-4 throughout the year.

Which of the following statements is true regarding the $1,000,000 limit on covered employees for publicly traded companies?

The limitation applies only to the CEO, CFO, three other highest compensated officers, and all covered employees from previous years.

Which of the following is true regarding stock options?

There is typically no tax effect on the grant date. Explanation No tax effect is incurred by employees or employers on the grant date.

Which of the following statements regarding employer-provided educational benefits is true?

Up to $5,250 in tuition benefits can be excluded. Explanation An annual benefit of $5,250 can be excluded.

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

Value of stock options granted during the year Explanation Stock options are reported as taxable compensation typically upon vesting.

Aharon exercises 10 stock options awarded several years ago. The following information pertains to the options: each option gives the employee the right to buy 10 shares, the market price on the grant date was $7, the strike price is $10, and the market price on the exercise date was $15. How much will it cost Aharon to purchase the options on the exercise date?

$1,000 Explanation $1,000 (10 options × 10 shares × $10 exercise price).

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?

$1,000 Explanation Employees may exclude up to $5,000 of dependent-care expenses.

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 2024, Tanya selected $4,020 ($335 per month) of parking, $1,360 in 401(k) contributions, and $800 of cash. How much must Tanya include in taxable income?

$1,040 Explanation $1,040 is includible: $240 of parking benefits [($335 − $315) × 12)] and $800 of cash.

Stevie recently received 1,085 shares of restricted stock from her employer, Nicks Corporation, when the share price was $10 per share. Stevie's restricted shares vested three years later when the market price was $13. Stevie held the shares for a little more than three years and sold them when the market price was $14. Assuming Stevie made an 83(b) election, what is the amount of Stevie's ordinary income with respect to the restricted stock?

$10,850 Explanation $10,850 (1,085 shares × $10 market price on grant date).

Grace's employer is now offering group-term life insurance. The company will provide each employee with $190,000 of group-term life insurance. It costs Grace's employer $890 to provide this amount of insurance to Grace each year. Assuming that Grace is 39 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. Uniform Premiums for $1,000 of Group-Term Life Insurance Protection: Five-Year Age BracketCost per $1,000 of Protection for One MonthUnder 25$0.0525 to 290.0630 to 340.0835 to 390.0940 to 440.1045 to 490.1550 to 540.2355 to 590.4360 to 640.6665 to 691.2770 and above2.06

$12.60 Explanation $190,000 policy less $50,000 exemption times $0.09 per month per $1,000 of coverage.

Bad Brad received 20 NQOs (each option gives him the right to purchase 30 shares of stock for $12 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 exercises 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 at the time of the sale?

$15,000 Explanation The basis is the $7,200 (600 shares × $12 strike price) cash paid and the $7,800 (600 shares × $13 bargain element) income recognized on the exercise—which is equal to the market price on the exercise date.

Kevin is the financial manager of Levingston BMW. The shop allows employees to purchase up to two vehicles per year at a discount. Levingston's average gross profit percentage is 15 percent. This year Kevin purchased a 530 model and a new M3. ModelFMVDealer costEmployee Price530$ 63,350$ 50,350$ 54,175M3$ 70,900$ 60,350$ 57,350 What amount must Kevin include in income?

$2,915 Explanation Kevin must include $2,915 into his gross income. This is because the $13,550 ($70,900 − $57,350) discount received on the M3 is larger than the qualified employee discount of $10,635 (sales price of $70,900 times the average gross profit percentage of 15 percent). There is no gross income from the purchase of the 530 since the $9,175 ($63,350 − $54,175) discount is less than the qualified employee discount of $9,503 ($63,350 times the average gross profit percentage of 15 percent).

Maren received 12 NQOs (each option gives her the right to purchase 7 shares of stock for $10 per share) at the time she started working, when the stock price was $8 per share. When the share price was $20 per share, she exercised all of her options. Eighteen months later, she sold all of the shares for $23 per share. How much gain will Maren recognize on the sale of the shares and how much tax will she pay assuming her marginal tax rate is 37 percent?

$252 gain and $50 tax Explanation The gain realized is $252 (84 shares × $23) less basis (84 shares × $20 exercise price). The tax is calculated as follows: $252 × 20% (preferential rate).

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 three years and sold them when the market price was $20. What is the amount of Tom's income or loss on the vesting date?

$28,000 Explanation 2,000 × $14 (market price on vesting date)

Kevin is the financial manager of Levingston BMW. The shop allows employees to purchase up to two vehicles per year at a discount. Levingston's average gross profit percentage is 15 percent. This year Kevin purchased a 530 model and a new M3. ModelFMVDealer costEmployee Price530$ 63,650$ 50,650$ 54,325M3$ 71,700$ 60,650$ 57,650 What amount must Kevin include in income?

$3,295 Explanation Kevin must include $3,295 into his gross income. This is because the $14,050 ($71,700 − $57,650) discount received on the M3 is larger than the qualified employee discount of $10,755 (sales price of $71,700 times the average gross profit percentage of 15 percent). There is no gross income from the purchase of the 530 since the $9,325 ($63,650 − $54,325) discount is less than the qualified employee discount of $9,548 ($63,650 times the average gross profit percentage of 15 percent).

Tom recently received 2,030 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 three years and sold them when the market price was $12. What is the amount of Tom's income or loss on the sale?

$4,060 loss Explanation $4,060 loss is $24,360 (2,030 shares × $12 market value on sale date) of sales proceeds less $28,420 (2,030 shares × $14 market price on vesting date) basis.

Tom recently received 2,160 shares of restricted stock from his employer, Independence Corporation, when the share price was $11 per share. Tom's restricted shares vested three years later when the market price was $15. Tom held the shares for a little more than three years and sold them when the market price was $13. What is the amount of Tom's income or loss on the sale?

$4,320 loss Explanation $4,320 loss is $28,080 (2,160 shares × $13 market value on sale date) of sales proceeds less $32,400 (2,160 shares × $15 market price on vesting date) basis.

Rachel receives employer-provided health insurance. The employer's cost of the health insurance is $6,800 annually. What is her employer's after-tax cost of providing the health insurance, assuming that the employer's marginal tax rate is 21 percent and the employer is profitable?

$5,372 Explanation The after-tax cost is the $6,800 outflow less the $1,428 ($6,800 × 21 percent) of income tax benefit.

Lara, a single taxpayer with a 32 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 21 percent marginal tax rate. Ignoring payroll taxes, what is the maximum amount of before-tax salary Lara would give up to receive health insurance?

$7,353 Explanation $5,000 ÷ (1 − 0.32)

Maren received 11 NQOs (each option gives her the right to purchase 14 shares of stock for $8 per share) at the time she started working, when the stock price was $10 per share. When the share price was $13 per share, she exercised all of her options. Eighteen months later, she sold all of the shares for $24 per share. What is the amount of Maren's bargain element?

$770 Explanation 11 options × 14 shares × ($13 market price at exercise − $8 exercise price).

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

Marginal tax rate and market price on grant date Explanation The market price on grant date is not needed.

Which of the following is a fringe benefit that allows employers to discriminate among employees when providing it?

Qualified transportation fringe