Exam 15: Compensation and Retirement Planning

Largo Inc., a calendar year corporation, accrued a $45,000 year-end bonus payable to its CEO in 2013. Largo and the CEO are not related parties. Largo paid the bonus to the CEO on April 3, 2014. Dargo can deduct the bonus in 2013.

Mr. Paul, age 73 and single, earned a $150,000 salary (AGI) as a university professor. He no longer participates in the university's qualified retirement plan. Which of the following is true?

Ms. Knox, age 34 and single, has $121,800 AGI, $108,200 of which is compensation income. Compute her maximum contribution to her Roth IRA.

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

Louise, age 51, quit her job and received a $70,000 distribution from her employer-sponsored qualified retirement plan. She immediately contributed $50,000 to a rollover IRA and used the remaining $20,000 to purchase a car. Compute the tax cost of the distribution if Louise has a 33% marginal tax rate on ordinary income.

Six years ago, HOPCO granted Lin Sing a nonqualified option to purchase 1,000 shares of HOPCO stock at $55 per share. On date of grant, the market price was $50 per share. This year, Lin Sing exercised the option when the market price was $64 per share. How much ordinary income does Lin Sing recognize because of the exercise?

Six years ago, HOPCO granted Lin Sing an incentive stock option (ISO) to purchase 1,000 shares of HOPCO stock for $55 per share. On date of grant, the market price was $50 per share. This year, Lin Sing exercised the ISO when the market price was $64 per share. How much ordinary income does she recognize because of the exercise?

What is the maximum IRA contribution that Mr. Higgins can make under each of the following assumptions? a. He is age 22 and single. His only income is $14,000 of interest and dividends from a trust fund. b. He is age 30 and single. His only income is a $35,000 distributive share of ordinary business income from a partnership. c. He is age 60 and single. His only income is $44,000 wages from his job. d. He is 45 and files a joint return with his wife. His sole proprietorship generates an $8,200 loss, and his wife's salary is $50,000.

Six years ago, Linus Corporation granted Pauline an incentive stock option (ISO) to purchase 5,000 shares of Linus stock for $13 per share. On date of grant, the market price was $11 per share. Last year, Pauline exercised the option when the market price was $47 per share. This year, she sold the stock for $40 per share. Compute Pauline's gain or loss recognized on sale.

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

The value of a nontaxable fringe benefit is different for each employee because employees have different financial needs and consumption preferences.

This year, Mr. Cox elected to contribute $4,000 of his $95,000 salary to his Section 401(k) plan. Mr. Cox's employer made a $4,000 matching contribution. How much compensation is reported on Mr. Cox's Form W-2?

Which of the following is not a benefit of nonqualified deferred compensation plans?

The classification of a worker as an employee or an independent contractor determines how much payroll tax a company must pay.

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?

An employee recognizes taxable income if his employer provides group-term life insurance coverage in excess of $50,000.

An employer is allowed to deduct the accrued expense for the employer's liability to pay nonqualified deferred compensation.

Eight years ago, Acnex Inc. granted Ms. Cardena a nonqualified option to purchase 1,000 shares of Acnex stock at $44 per share. On date of grant, the market price was $42 per share. This year, Ms. Cardena exercised the option when the market price was $75 per share. Which of the following statements is true?

Carl Meyer, age 56, terminated his employment with his corporate employer because he wanted to begin a second career as a freelance photographer. If Carl withdraws funds from his employer-sponsored qualified plan, he will pay the 10% premature withdrawal penalty.

Mr. Scott, age 46, quit his job with MNP Inc. and withdrew the $184,000 balance in his Section 401(k) plan. Mr. Scott immediately deposited the withdrawal in a new rollover Roth IRA with a local bank. Which of the following statements is false?