Question 1

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?

Accepted Answer

A) $1,500. 
B) $5,000. 
C) $7,143. 
D) $8,333.$5,000/(1 - .3) .

Question 2

Up to $10,000 of dependent care expenses can be excluded from an employee's compensation.The limit is $5,000.

Accepted Answer

A) True 
 B)False

Question 3

Tom recently received 2,000 shares of restricted stock from his employer,Independence Corporation,when the share price was $10 per share.Tom's restricted shares vested three years later when the market price was $14.Tom held the shares for a little more than a year and sold them when the market price was $12.What is the amount of Tom's income or loss on the sale?

Accepted Answer

A) $0 
B) $2,000 loss 
C) $4,000 gain 
D) $4,000 loss

Question 4

Which of the following items is not included on an employee's Form W-2?

Accepted Answer

A) Taxable wages,tips,and compensation 
B) Social Security withholding 
C) Value of stock options granted during the year 
D) Federal and state income tax withholding

Question 5

An employee's income with respect to restricted stock is the fair market value on the vesting date.

Accepted Answer

A) True 
 B)False

Question 6

Which of the items is not correct regarding withholding?

Accepted Answer

A) Employees that also have self employment income can have additional amounts withheld to avoid estimated tax payments. 
B) Employees cannot claim an allowance for a child unless they are entitled to claim the child as a dependent. 
C) Employees can claim exempt and avoid withholding. 
D) Married employees can choose to be withheld at the higher single rates.Additional allowances can be claimed for many purposes (e.g. ,large itemized deductions) in addition to personal and dependency exemptions.

Question 7

On Form W-4,an employee can only claim one allowance for each personal or dependency exemption that will be claimed on the employee's income tax return.

Accepted Answer

A) True 
 B)False

Question 8

Tom recently received 2,000 shares of restricted stock from his employer,Independence Corporation,when the share price was $10 per share.Tom's restricted shares vested three years later when the market price was $14.Tom held the shares for a little more than a year and sold them when the market price was $20.What is the amount of Tom's income or loss on the vesting date?

Accepted Answer

A) $0. 
B) $10,000. 
C) $20,000. 
D) $28,000.2,000 × $14 (market price on vesting date) .

Question 9

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

Accepted Answer

A) True 
 B)False

Question 10

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

Accepted Answer

A) Monthly employer provided transit benefit of $100. 
B) Group-term life insurance policy providing $100,000 of coverage. 
C) Employer provided parking of $100 per month. 
D) Qualified employee discounts.Only $50,000 of group-term life insurance qualifies as a nontaxable fringe benefit.

Question 11

Which of the following isn't done by Form W-2?

Accepted Answer

A) Summarizes the employee's taxable salary and wages. 
B) Provides annual Federal and state withholding information. 
C) Indicates whether an employee had more than one employer during the year. 
D) Generated by an employer annually.The W-2 only provides information about the employer providing the statement.

Question 12

Which of the following does not qualify as a "for the convenience of the employer" nontaxable fringe benefit?

Accepted Answer

A) The fair market value of the rent of an apartment manager living on the premises. 
B) An overtime meal provided to an employee while working late. 
C) A meal provided by a hospital to residents during their shift. 
D) A company picnic.The value of a company picnic is a nontaxable fringe benefit,but it is not a "for the convenience of the employer" benefit.

Question 13

Employees will always prefer to receive incentive stock options over nonqualified stock options.

Accepted Answer

A) True 
 B)False

Question 14

Employers computing taxable income under the accrual method 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.

Accepted Answer

A) True 
 B)False

Question 15

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

Accepted Answer

A) No additional cost service. 
B) Qualified employee discount. 
C) Qualified transportation fringe. 
D) Employee educational assistance.See Exhibit 12-13.

Question 16

Kevin is the financial manager of Levingston BMW.The shop allows employees to purchase up to two vehicles at a discount.This year Kevin purchased a 530 model and a new M3.  If the average gross profit percentage of the shop's goods is 12%,what amount must Kevin include in income?

Accepted Answer

A) $0 
B) $1,640 
C) $3,000 
D) $17,000

Question 17

Which of the following statements is true regarding excess Social Security contributions by an employer?

Accepted Answer

A) Excess contributions are treated as additional income tax withholding payments. 
B) A second employer can stop withholding once an employee's total contributions reach the Social Security wage base. 
C) The Treasury returns excess Social Security Withholding to employers. 
D) Excess contributions are treated as voluntary contributions to the Treasury.Excess payments are treated as additional voluntary contributions to the Treasury.

Question 18

Which of the following statements regarding employer provided educational benefits is true?

Accepted Answer

A) All undergraduate tuition expenses can be excluded. 
B) Only educational benefits from public universities can be excluded. 
C) Up to $5,250 in tuition benefits can be excluded. 
D) All graduate tuition expenses are included.An annual benefit of $5,250 can be excluded.

Question 19

The date on which stock options are given to the employee is called the exercise date.The grant date is the date employees are initially allocated stock options.

Accepted Answer

A) True 
 B)False

Question 20

Maren received 10 NQOs (each option gives her the right to purchase 10 shares of stock for $8 per share) at the time she started working when the stock price was $6 per share.When the share price was $15 per share,she exercised all of her options.Eighteen months later she sold all of the shares for $20 per share.How much gain will Maren recognize on the sale and how much tax will she pay assuming her marginal tax rate is 35 percent?

Accepted Answer

A) $0 gain and $0 tax. 
B) $500 gain and $75 tax. 
C) $500 gain and $175 tax. 
D) $1,200 gain and $180 tax.The gain realized is $500 (100 shares × $20) less basis (100 shares × $15 exercise price) .The tax is calculated as follows: $500 × 15% (preferential rate) .

Exam 12: Compensation

Up to $10,000 of dependent care expenses can be excluded from an employee's compensation.The limit is $5,000.

Which of the following items is not included on an employee's Form W-2?

An employee's income with respect to restricted stock is the fair market value on the vesting date.

Which of the items is not correct regarding withholding?

On Form W-4,an employee can only claim one allowance for each personal or dependency exemption that will be claimed on the employee's income tax return.

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

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

Which of the following isn't done by Form W-2?

Which of the following does not qualify as a "for the convenience of the employer" nontaxable fringe benefit?

Employees will always prefer to receive incentive stock options over nonqualified stock options.

Employers computing taxable income under the accrual method 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.

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

Kevin is the financial manager of Levingston BMW.The shop allows employees to purchase up to two vehicles at a discount.This year Kevin purchased a 530 model and a new M3. If the average gross profit percentage of the shop's goods is 12%,what amount must Kevin include in income?

Which of the following statements is true regarding excess Social Security contributions by an employer?

Which of the following statements regarding employer provided educational benefits is true?

The date on which stock options are given to the employee is called the exercise date.The grant date is the date employees are initially allocated stock options.