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Exam 12: Compensation

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Question 51

Multiple Choice

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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.

E) A) and D)
F) B) and D)

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Question 52

Short Answer

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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 21 percent marginal tax rate. What is the maximum amount of before-tax salary Lina would give up to receive health insurance? (Round your answer to the nearest whole number.)

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$12,308
$8...

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Question 53

Multiple Choice

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

When a publicly traded CEO's salary exceeds $1,000,000, the employee ________ taxed on the entire amount, and the employer ________ allowed a deduction on the entire amount.

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

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?

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?

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

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?

Fringe benefits are generally a form of non-cash compensation.

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?

Stock options will always provide employees with future compensation.

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

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.

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?

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%. This year Kevin purchased a 530 model and a new M3. What amount must Kevin include in income?

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. If the employer's average gross profit percentage is 30 percent, what amount must Jane include in income?

Kimberly's employer provides her with a personal travel allowance of $10,000 annually. Her marginal tax rate is 32 percent. Her employer has a marginal tax rate of 21 percent. What is Kimberly's after-tax benefit, ignoring payroll taxes?

Current compensation is usually comprised of salary, wages, and bonuses.

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 $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 of the stock options?