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Exam 12: Compensation

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Question 1

True/False

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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 2½ months after the employer's year-end.

A) True
B) False

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Question 2

Multiple Choice

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

A) No additional cost service.
B) Qualified employee discount.
C) Qualified transportation fringe.
D) Employee educational assistance.

E) A) and D)
F) A) and C)

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Question 3

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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 ten additional months 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?

Up to $5,250 of educational benefits can be excluded from an employee's compensation.

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)

Which of the following statements regarding compensation is false?

The date on which stock options are no longer subject to forfeiture is called the vesting date.

For 2018, up to $300 of transportation fringe benefits can be excluded from income.

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 and sold them when the market price was $15. What is the amount of Rick's gain on the sale of the stock? Assuming a marginal tax rate of 37 percent, what is Rick's tax on the sale of the stock?

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. EXHIBIT 12-08 Uniform Premiums for $1,000 of Group-Term Life Insurance Protection

Employer's expense for stock options is typically recognized earlier for book than tax purposes.

Which of the following forms is filled out by an employee, who is a citizen, at the beginning of an employment relationship?

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. If Hazel holds the shares for two years and sells them when the market price is $25, how much gain will Hazel recognize on the sale and how much tax will she pay assuming her marginal tax rate is 37 percent?

Which of the following statements regarding restricted stock is false?

Group-term life insurance is a fringe benefit that can be partially taxable and partially tax free.

The employee's income for restricted stock is typically measured on the grant date.

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

A cafeteria plan provides employees discounted meals at a company sponsored dining room.

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

Which of the following is false regarding dependent care expenses?