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Exam 12: Compensation

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Question 31

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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?

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Question 32

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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?

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Question 33

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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?

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

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

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

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. $\begin{array} { | l | l | l | l | } \hline \text { Model } & \text { FMV } & \text { Dealer cost } & \text { Employee Price } \\\hline \mathbf { 5 3 0 } & \mathbf { \$ 6 3 , 0 0 0 } & \mathbf { \$ 5 0 , 0 0 0 } & \mathbf { \$ 5 4 , 0 0 0 } \\\hline \text { M3 } & \$ 65,000 & \$ 60,000 & \mathbf { \$ 5 7 , 0 0 0 } \\\hline\end{array}$ What amount must Kevin include in income?

Flexible spending accounts allow employees to set aside before-tax dollars for medical and dependent care expenses.

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?

Cornhusker Bank reimburses employees for dues to the local bankers association. The reimbursement is includible in the employee's income.

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?

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

Which of the following is a fringe benefit that employers can discriminate among employees?

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

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?

Which of the items is not correct regarding withholding?

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

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

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

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?