Exam 15: Compensation and Retirement Planning

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 $16,500 compensation expense for the estimated value of the option. Five years after Haven granted the option to Olivia, she exercised it on a day when Haven stock was selling for $27 per share. a. How much income must Olivia recognize in the year of exercise? b. What is Haven's tax deduction in the year of exercise? c. What is the effect of the exercise on Haven's book income and deferred taxes?

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.

Mrs. Pike's 2013 compensation from her corporate employer consisted of $325,000 current salary and $75,000 unfunded deferred compensation payable upon her retirement in 2017. Which of the following statements is true?

Lawrence is a U.S. citizen who has worked in his employer's Paris office for the past five years. Compute Lawrence's 2013 AGI if his only item of income was his $130,000 salary.

Vernon Inc. needs an additional worker on a multiyear project. Vernon could either hire an employee for a $70,000 annual salary or engage an independent contractor for a $75,000 annual fee. If Vernon's marginal income tax rate is 34%, which option minimizes the after-tax cost of obtaining the worker?

Mrs. Soon retired at age 68 and withdrew the entire $77,100 balance from an IRA to buy a sailboat. She opened this account in 1999. Which of the following statements is false?

Lansing Corporation, a publicly held company with a 35% marginal tax rate, paid its CEO an annual salary of $2.3 million. Ignoring payroll taxes, calculate the after-tax cost of this payment.

A Keogh plan maintained for the owner of an unincorporated business must cover all employees of the business on a nondiscriminatory basis.

Jason Inc. maintains a qualified profit-sharing plan for its employees. This year, Jason contributed $2,300 to Ms. Preston's profit-sharing account. Which of the following statements is true?

Six years ago, HOPCO granted Ms. Cardena a nonqualified option to purchase 1,000 shares of HOPCO stock at $12 per share. On date of grant, the market price was $10 per share. This year, Ms. Cardena exercised the option when the market price was $33 per share. Compute HOPCO's deduction resulting from the exercise.

Unreimbursed employment-related business expenses are a miscellaneous itemized deduction.

Employers must withhold state and federal income tax from compensation paid to independent contractors.

Mr. Hazel, the principal executive officer of a publicly held corporation, received $2.5 million compensation this year. The compensation consisted of an $800,000 salary and a $1.7 million bonus because Mr. Hazel met a performance goal established by outside members of the board of directors. The corporation is allowed to deduct the entire amount of Mr. Hazel's compensation.

Which of the following statements regarding a Roth IRA is false?

A shareholder-employee of an S corporation prefers to receive a greater salary rather than a greater pro-rata share of corporate taxable income.

Lana, an employee of Compton University, paid $1,500 for professional journal subscriptions and $1,000 of membership dues to academic organizations. These unreimbursed employment-related expenses are Lana's only miscellaneous itemized deduction. Which of the following statements is false?

A stock option is the right to purchase the stock of a corporate employer at a stated price for an indefinite period of time.

Any individual taxpayer who earns any amount of compensation or self-employment income can contribute $5,500 to a traditional IRA.

Nonqualified deferred compensation plans are prohibited from discriminating in favor of highly compensated employees.

Which of the following statements regarding the tax consequences of wages is false?