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Exam 12: Compensation

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Question 21

Multiple Choice

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

A) Determines an employee's income tax withholding.
B) Employees can claim more allowances than personal exemptions that will be claimed.
C) Employees can specify additional amounts to be withheld each month.
D) The form can only be adjusted at the beginning of year or start of employment.

E) C) and D)
F) B) and C)

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Question 22

Multiple Choice

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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

E) All of the above
F) A) and D)

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Question 23

True/False

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

Brandy graduated from Vanderbilt with her bachelor's degree recently. She works for Walton & Company CPAs. The firm pays her tuition ($8,000 per year) for her so that she can receive her MBA. How much of the $8,000 tuition benefit does Brandy need to include in her income?

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

Bad Brad received 20 NQOs (each option gives him the right to purchase 30 shares of stock for $10 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 intends to exercise 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?

Stock options will always provide employees with future compensation.

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

Raja received 20 NQOs (each option gives him the right to purchase 15 shares of stock for $10 per share) from his employer at the time he started working when the stock price was $11 per share. Now that the share price is $20 per share, he intends to exercise all of the options using a same-day sale. What are Raja's after-tax proceeds from the sale if his marginal tax rate is 30 percent?

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?

Big Bucks paid its CEO $1,500,000 of compensation for the year. What is the after-tax cost of paying the salary assuming a 30 percent marginal tax rate?

Hazel received 20 NQOs (each option gives her the right to purchase 10 shares of stock for $7 per share) at the time she started working when the stock price was $14 per share. Now that the share price is $20 per share, she intends to exercise all of her options. How much income will Hazel recognize on the exercise date and how much tax will she pay assuming her marginal tax rate is 25 percent?

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

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 35 percent?

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?

Which of the following is not a purpose of equity-based compensation?

Leesburg paid its employee $200,000 of compensation for the year. What is the after-tax cost of paying the salary assuming a 30 percent marginal tax rate (ignore payroll taxes)?

Which of the following is false regarding dependent care expenses?

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.

Employees may exclude from income items such as occasional theater tickets, t-shirts, or a Thanksgiving turkey.