Chp - 12

79) 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? A) $0 B) $25 C) $40 D) Some other amount

A) $0

77) 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) Complimentary 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

A) Free tax return preparation from a client

51) 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

A) Grant date

68) Which of the following is false regarding a section 83(i) election? A) The election allows employees of any corporation to defer income tax liability. B) The election is an important tax-planning tool for illiquid equity grants. C) The election must be made within 30 days of the grant date. D) The election may terminate on the date the employer stock becomes publicly traded.

A) The election allows employees of any corporation to defer income tax liability.

83) 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

B) $1,000

85) 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 2020, Tanya selected $3,480 ($290 per month) of parking, $1,720 in 401(k) contributions, and $800 of cash. How much must Tanya include in taxable income? A) $0 B) $1,040 C) $3,480 D) $4,280

B) $1,040

71) 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. Uniform Premiums for $1,000 of Group-Term Life Insurance Protection: Five-Year Age Bracket Cost per $1,000 of Protection for One Month Under 25 $0.05 25 to 29 0.06 30 to 34 0.08 35 to 39 0.09 40 to 44 0.10 45 to 49 0.15 50 to 54 0.23 55 to 59 0.43 60 to 64 0.66 65 to 69 1.27 70 and above 2.06 A) $0 B) $15.00 C) $22.00 D) $58.33

B) $15.00

80) Kevin is the financial manager of Levingston BMW. The shop allows employees to purchase up to two vehiclesper year at a discount. Levingston's average gross profit percentage is 15 percent. This year Kevin purchased a 530 model and a new M3. Model FMV Dealer cost Employee Price 530 $ 63,000 $ 50,000 $ 54,000 M3 $ 70,000 $ 60,000 $ 57,000 What amount must Kevin include in income? A) $0 B) $2,500 C) $2,950 D) $22,000

B) $2,500

72) Grace's employer is now offering group-term life insurance. The company will provide each employee with $165,000 of group-term life insurance. It costs Grace's employer $815 to provide this amount of insurance to Grace each year. Assuming that Grace is 53 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 Bracket Cost per $1,000 of Protection for One Month Under 25 $0.05 25 to 29 0.06 30 to 34 0.08 35 to 39 0.09 40 to 44 0.10 45 to 49 0.15 50 to 54 0.23 55 to 59 0.43 60 to 64 0.66 65 to 69 1.27 70 and above 2.06 A) $0 B) $26.45 C) $35.85 D) $74.34

B) $26.45

81) Kevin is the financial manager of Levingston BMW. The shop allows employees to purchase up to two vehiclesper year at a discount. Levingston's average gross profit percentage is 15 percent. This year Kevin purchased a 530 model and a new M3. Model FMV Dealer cost Employee Price 530 $ 63,050 $ 50,050 $ 54,025 M3 $ 70,800 $ 60,050 $ 57,050 What amount must Kevin include in income? A) $0 B) $3,130 C) $2,950 D) $22,000

B) $3,130

56) Maren received 12 NQOs (each option gives her the right to purchase 8 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 $17 per share, she exercised all of her options. Eighteen months later she sold all of the shares for $22 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? A) $0 gain and $0 tax B) $480 gain and $96 tax C) $480 gain and $178 tax D) $1,152 gain and $230 tax

B) $480 gain and $96 tax

55) 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 of the shares and how much tax will she pay assuming her marginal tax rate is 37 percent? A) $0 gain and $0 tax B) $500 gain and $100 tax C) $500 gain and $185 tax D) $1,200 gain and $240 tax

B) $500 gain and $100 tax

54) Maren received 12 NQOs (each option gives her the right to purchase 15 shares of stock for $9 per share) at the time she started working when the stock price was $11 per share. When the share price was $12 per share, she exercised all of her options. Eighteen months later she sold all of the shares for $25 per share. What is the amount of Maren's bargain element? A) $0 B) $540 C) $180 D) $2,160 E) None of the choices are correct.

B) $540

53) 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) $700 C) $900 D) $1,500 E) None of the choices are correct.

B) $700

82) 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.

B) Employers may discriminate among employees

73) 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

B) Group-term life insurance policy providing $100,000 of coverage

60) 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 are no effective tax planning elections for restricted stock.

B) Like nonqualified stock options, the employee's income inclusion for restricted stock is the bargain elemen

58) 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

B) Strike price and market price on grant dat

50) 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.

B) There is typically no tax effect on the grant date.

48) For compensation plans adopted by a publicly traded company in the current year, 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

B) is; is not

67) Stevie recently received 1,040 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 a year and sold them when the market price was $14. 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) $1,040 C) $10,400 D) $13,520

C) $10,400

59) 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? A) $7,200 B) $7,800 C) $15,000 D) $16,200

C) $15,000

69) 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 monthly employer-provided parking D) Automobile allowance

C) $225 of monthly employer-provided parking

70) Bonnie's employer provides her with an annual dinner club membership costing $5,000. Her marginal tax rate is 24 percent. Her employer has a marginal tax rate of 21 percent. What is Bonnie's after-tax benefit? A) $0 B) $1,200 C) $3,800 D) $5,000

C) $3,800

74) 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 21 percent and the employer is profitable? A) $0 B) $1,260 C) $4,740 D) $6,000

C) $4,740

75) Rachel receives employer-provided health insurance. The employer's cost of the health insurance is $6,400 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 andthe employer is profitable? A) $0 B) $1,344 C) $5,056 D) $6,400

C) $5,056

87) 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? (Round your answer to the nearest whole number.) A) $1,600 B) $5,000 C) $7,353 D) $15,625

C) $7,353

66) 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

C) $8,000

42) Which of the following forms is used to determine income tax withholding for an employment relationship? A) Form Q-2 B) Form W-2 C) Form W-4 D) Form 1099

C) Form W-4

45) Which of the following isn't reported on the Form W-2? A) The employee's taxable salary and wages B) Annual federal and state withholding information C) Indication as to whether an employee had more than one employer during the year D) Annual amount of Social Security and Medicare tax withholding information

C) Indication as to whether an employee had more than one employer during the year

86) Which of the following is a fringe benefit that allows employers to discriminate among employees when providing it? A) No-additional-cost service B) Qualified employee discount C) Qualified transportation fringe D) Employee educational assistance

C) Qualified transportation fringe

57) 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

C) The difference between the market price on the exercise date and the strike price

78) 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

C) The discount can be elected up to five times annually.

76) 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.

C) Up to $5,250 in tuition benefits can be exclude

43) 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

C) Value of stock options granted during the year

52) 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

D) $1,000

65) 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

D) $11,000

61) 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) $10,000 C) $20,000 D) $28,000

D) $28,000

62) 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

D) $4,000 loss

63) Tom recently received 2,100 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 a year and sold them when the market price was $13. What is the amount of Tom's income or loss on the sale? A) $0 B) $2,100 loss C) $4,200 gain D) $4,200 loss

D) $4,200 loss

84) 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 receipt of cash option that is elected is treated as taxable compensation. D) All of the statements are true.

D) All of the statements are true.

44) 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 two and a half months of year-end are included in employee's compensation in the year they were earned.

D) Bonuses paid within two and a half months of year-end are included in employee's compensation in the year they were earned.

64) Which of the following is false regarding a section 83(b) election? A) The election freezes the value of the employee's compensation as of 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.

D) If an employee leaves before the vesting date, any loss is limited to $3,000.

49) Which of the following is not a purpose of equity-based compensation? A) Provides both risk and incentives to employees B) Motivates employees by aligning employee and employer incentives C) Avoids compensation limits for certain publicly traded company executives D) Provides a low- or no-cost form of compensation

D) Provides a low- or no-cost form of compensation

46) Which of the following regarding the Form W-4 is incorrect? A) It determines an employee's income tax withholding. B) Employees can claim dependents. C) Employees can specify additional amounts to be withheld each month. D) The form can only be adjusted at the beginning of the year or start of employment

D) The form can only be adjusted at the beginning of the year or start of employment

47) Which of the following statements is true regarding the $1,000,000 limit on covered employees for publicly traded companies? 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, CFO, three other highest compensated officers, and all covered employees from previous years

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

103) Employers always prefer to award incentive stock options rather than nonqualified stock options. ⊚ true ⊚ false

false

106) Without an election, the income from an employee's restricted stock is measured on the grant date. ⊚ true ⊚ false

false

108) A section 83(b) election freezes the value of restricted stock for compensation purposes on the vesting date. ⊚ true ⊚ false

false

114) Employers cannot discriminate between highly and non-highly compensated employees when providing taxable fringe benefits. ⊚ true ⊚ false

false

118) Up to $10,000 of dependent care expenses can be excluded from an employee's compensation. ⊚ true ⊚ false

false

121) Cornhusker Bank reimburses employees for dues to the local banker's association. The reimbursement is includible in the employee's income. ⊚ true ⊚ false

false

123) For 2020, up to $300 of transportation fringe benefits can be excluded from income. ⊚ true ⊚ false

false

124) A cafeteria plan provides employees discounted meals at a company-sponsored dining room. ⊚ true ⊚ false

false

89) Employees complete a Form W-2 to specify their income tax withholding. ⊚ true ⊚ false

false

96) An employer always receives a deduction for total compensation paid to a CEO. ⊚ true ⊚ false

false

98) The date on which stock options are given to the employee is called the exercise date. ⊚ true ⊚ false

false

99) Stock options will always provide employees with future compensation. ⊚ true ⊚ false

false

100) The date on which stock options are no longer subject to forfeiture is called the vesting date. ⊚ true ⊚ false

true

101) When stock options are exercised, they are converted into actual employer stock. ⊚ true ⊚ false

true

102) Employees will always prefer to receive incentive stock options over nonqualified stock options. ⊚ true ⊚ false

true

104) Employer's expense for stock options is typically recognized earlier for book than tax purposes. ⊚ true ⊚ false

true

105) The use of restricted stock is increasing relative to the use of stock options. ⊚ true ⊚ false

true

107) An employee's income with respect to restricted stock is the fair market value on the vesting date. ⊚ true ⊚ false

true

109) A section 83(i) election freezes the value of restricted stock for compensation purposes on the vesting date. ⊚ true ⊚ false

true

110) Fringe benefits are generally a form of noncash compensation. ⊚ true ⊚ false

true

111) Taxable fringe benefits include automobile allowances, gym memberships, and personal-use tickets to the theater or sporting events. ⊚ true ⊚ false

true

112) Group-term life insurance is a fringe benefit that can be partially taxable and partially tax-free. ⊚ true ⊚ false

true

113) Employers sometimes pay a "gross-up" to employees to cover taxes associated with taxable fringe benefits they provide. ⊚ true ⊚ false

true

115) Health insurance is an example of a nontaxable fringe benefit. ⊚ true ⊚ false

true

116) If certain conditions are met, an apartment manager can exclude the fair market value of free rent from his or her income. ⊚ true ⊚ false

true

117) Up to $5,250 of educational benefits can be excluded from an employee's compensation. ⊚ true ⊚ false

true

119) Hotel employees can receive free lodging on a space-available basis without incurring compensation. ⊚ true ⊚ false

true

120) Qualified employee discounts allow employees to purchase employer goods at a discount. ⊚ true ⊚ false

true

122) Employees may exclude from income items such as occasional theater tickets, T-shirts, or a Thanksgiving turkey. ⊚ true ⊚ false

true

125) Flexible spending accounts allow employees to set aside before-tax dollars for medical and dependent care expenses. ⊚ true ⊚ false

true

88) Current compensation is usually comprised of salary, wages, and bonuses. ⊚ true ⊚ false

true

90) Employers computing taxable income receive a deduction for reasonable salary and wages paid to employees. ⊚ true ⊚ false

true

91) Employers computing taxable income under the accrual method to unrelated taxpayers 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 two and a half months after the employer's year-end. ⊚ true ⊚ false

true

92) One purpose of Form W-4 is to determine an employee's withholding. ⊚ true ⊚ false

true

93) On Form W-4, an employee can change their withholding through claiming dependents, other adjustments for non-wage income or deductions, and choosing extra withholding. ⊚ true ⊚ false

true

94) An employee can indicate whether they want an additional amount withheld for payroll taxes on the Form W-4. ⊚ true ⊚ false

true

95) Employers receive a deduction for compensation paid to and employment taxes paid on behalf of employees. ⊚ true ⊚ false

true

97) One primary purpose of equity compensation is to motivate employees. ⊚ true ⊚ false

true