Exam 15: Compensation and Retirement Planning

Lansing Corporation, a publicly held company with a 35% marginal tax rate, paid its CEO an annual salary of $1 million plus a bonus of $1.3 million. The bonus was based a targeted amount of annual gross revenue. Ignoring payroll taxes, calculate the after-tax cost of this payment.

This year, Haven Corporation granted a nonqualified stock option to Olivia to buy 5,000 shares of Haven stock for $20 for five years. At date of grant, Haven stock was selling on the Nasdaq for $19 per share. For financial statement purposes, Haven recorded a $16,500 compensation expense for the estimated value of the option. a. How much income must Olivia recognize as a result of the grant of the option? b. Can Haven deduct the $16,500 compensation expense on this year's tax return? c. Assuming a 35% tax rate, compute Haven's deferred tax asset or deferred tax liability (identify which) resulting from the $16,500 compensation expense.

Both traditional IRAs and Roth IRAs are tax-exempt accounts.

Harold Biggs is provided with $200,000 coverage under his employer's group-term life insurance plan. Which of the following statements is true?

Which of the following statements concerning the employer-employee relationship is true?

Mr. and Mrs. Williams are the sole shareholders of Lessing, Inc., an S corporation. Last year, Lessing employed the Williams' son and paid him a $50,000 salary. During a recent IRS audit, the revenue agent discovered that the son rarely shows up for work and spends most of his time playing golf. Which of the following statements is true?

Dargo Inc., a calendar year corporation, accrued a $75,000 year-end bonus payable to its CEO in 2012. Dargo and the CEO are not related parties. Dargo paid the bonus to the CEO on February 8, 2013. Dargo can deduct the bonus in 2012.

The IRS is less likely to raise the issue of reasonable compensation during the audit of a publicly held corporation than a closely held corporation.

Unreimbursed moving expenses are a miscellaneous itemized deduction.

Wallace Corporation needs an additional worker on a multiyear project. It could hire an employee for a $30,000 annual salary. Alternatively, it could engage an independent contractor for a $35,000 annual fee. Which of the following is true?

Which of the following is not a factor considered by the courts when evaluating the reasonableness of an employee's compensation?

Defined-contribution plans provide participants with a targeted retirement benefit, typically in the form of a monthly pension.

The 10% penalty imposed on premature withdrawals from qualified retirement plans is intended to discourage participants from withdrawing funds before retirement.

Qualified withdrawals from both traditional and Roth IRAs are tax-exempt.

Stock options are a form of compensation that requires a substantial cash outlay by the corporate employer.

Which of the following statements comparing traditional and Roth IRAs is false?

Ms. Knox, age 34 and single, has $119,800 AGI, $108,200 of which is compensation income. Compute her maximum contribution to her Roth IRA.

Any individual taxpayer who earns any amount of compensation or self-employment income can contribute $5,000 to a traditional IRA.

Which of the following statements concerning the client-independent contractor relationship is false?

Retired participants in employer-sponsored qualified retirement plans must begin receiving distributions no later than the year following the year in which they reach age 70½.