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Exam 12: Compensation

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Question 1

Multiple Choice

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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.

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

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Question 2

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

A) True
B) False

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Question 3

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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?

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?

One primary purpose of equity compensation is to motivate employees.

Employers computing taxable income receive a deduction for salary and wages paid to employees.

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

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. $\begin{array} { | l | l | l | l | } \hline \text { Model } & \text { FMV } & \text { Dealer cost } & \text { Employee Price } \\\hline \text { Driver } & \$ 600 & \$ 400 & \$ 450 \\\hline \text { Irons } & \$ 1,200 & \$ 700 & \$ 800 \\\hline \text { Balls } & \$ 80 & \$ 75 & \$ 70 \\\hline \text { Bag } & \$ 250 & \$ 175 & \mathbf { \$ 2 0 0 } \\\hline\end{array}$ If the employer's average gross profit percentage is 30 percent, what amount must Jane include in income?

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?

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?

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?

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 income on the sale of the stock? Assuming a marginal tax rate of 30 percent, what is Rick's tax on the sale of the stock?

Employers cannot discriminate between highly and non-highly compensated employees when providing taxable fringe benefits.

Health insurance is an example of a nontaxable fringe benefit.

Lara, a single taxpayer with a 30 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 40 percent marginal tax rate. Ignoring payroll taxes, what is the maximum amount of before-tax salary Lara would give up to receive health insurance?

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

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

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

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

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