Question 1

For compensation plans adopted by a publicly traded company in the current year, when a CEO's salary exceeds $1,000,000, the employee ______ taxed on the entire amount, and the employer ______ allowed a deduction on the entire amount.
A)is; is
B)is; is not
C)is not; is
D)is not; is not

Accepted Answer

The CEO is taxed on the entire amount exceeding $1,000,000, but the employer is not allowed a deduction for the amount that exceeds $1,000,000 according to IRS regulations.

Question 2

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?
A)$0
B)$10,000
C)$20,000
D)$28,000

Accepted Answer

On the vesting date, the value of Tom's shares is calculated by multiplying the number of shares (2,000) by the market price at vesting ($14). This gives a total value of $28,000, which represents the income Tom would recognize at the time of vesting, as the shares are considered compensation for services rendered.

Question 3

How is the bargain element for a stock option calculated?
A)The difference between the strike price and the market price on the date of grant
B)The difference between the market price on the exercise date and the market price on the date of grant
C)The difference between the market price on the exercise date and the strike price
D)The difference between the market price on the sale date and the strike price

Accepted Answer

The bargain element for a stock option is calculated as the difference between the market price on the exercise date and the strike price. This represents the discount given to the option holder and is typically taxable as ordinary income.

Question 4

Which of the following statements is true regarding the $1,000,000 limit on covered employees for publicly traded companies?
A)The limitation applies to all employees.
B)The limitation applies to all officers.
C)The limitation applies only to the CEO and three other highest compensated officers.
D)The limitation applies only to the CEO, CFO, three other highest compensated officers, and all covered employees from previous years.

Accepted Answer

The $1,000,000 limit on covered employees for publicly traded companies applies only to the CEO, CFO, three other highest compensated officers, and includes all covered employees from previous years. This means once an employee is considered a covered employee subject to the limit, they remain so in subsequent years.

Question 5

Which of the following is true regarding stock options?
A)A loss is realized when stock options lapse.
B)There is typically no tax effect on the grant date.
C)Income recognized on the exercise date is greater for incentive stock options than nonqualified options.
D)The bargain element on a nonqualified option is taxed to employees at capital gain rates.

Accepted Answer

Typically, there is no tax effect for the recipient of stock options on the grant date. The tax implications usually occur at the time of exercise or sale of the acquired shares, depending on the type of option (incentive stock options vs. nonqualified stock options).

Question 6

Which of the following pairs of items is not needed to calculate the after-tax proceeds for a same-day sale?
A)Strike price and market price on exercise date
B)Strike price and market price on grant date
C)Market price on sale date and market price on exercise date
D)Market price on sale date and marginal tax rate

Accepted Answer

To calculate the after-tax proceeds for a same-day sale, we need to know the market price on the sale date and the market price on the exercise date, as well as the marginal tax rate. The strike price is irrelevant to this calculation, but it may be needed to calculate the gain or loss on the option. The market price on the grant date is also irrelevant to the calculation of after-tax proceeds for a same-day sale.

Question 7

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

Accepted Answer

The answer of Tom recently received 2,000 shares of restricted...

Question 8

Which of the following regarding the Form W-4 is incorrect?
A)It determines an employee's income tax withholding.
B)Employees can claim dependents.
C)Employees can specify additional amounts to be withheld each month.
D)The form can only be adjusted at the beginning of the year or start of employment.

Accepted Answer

The form can be adjusted at any time by the employee if their tax situation changes, not just at the beginning of the year or start of employment.

Question 9

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

Accepted Answer

Aharon exercises 10 stock options, each allowing him to buy 10 shares at the strike price of $10. Therefore, the cost is 10 options * 10 shares/option * $10/share = $1,000.

Question 10

Maren received 10 NQOs (each option gives her the right to purchase 15 shares of stock for $7 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. What is the amount of Maren's bargain element?
A)$0
B)$1,200
C)$1,350
D)$2,250
E)None of the choices are correct.

Accepted Answer

The answer of Maren received 10 NQOs (each option gives...

Question 11

Which of the following is false regarding a section 83(b)election?
A)The election freezes the value of the employee's compensation as of the grant date.
B)The election is an important tax-planning tool if the stock is expected to increase in value.
C)The election must be made within 30 days of the grant date.
D)If an employee leaves before the vesting date, any loss is limited to $3,000.

Accepted Answer

This statement is false. If an employee leaves before the vesting date, they forfeit the unvested stock and do not receive any compensation. There is no limit to the potential loss.

Question 12

Which of the following refers to the date stock options are awarded to an employee?
A)Grant date
B)Exercise date
C)Lapse date
D)Vesting date

Accepted Answer

The grant date is the date on which stock options are awarded to an employee.

Question 13

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?
A)$0
B)$5,000
C)$8,000
D)$11,000

Accepted Answer

The ordinary income is calculated based on the market price at the time the restricted stock vests. Therefore, Stevie's ordinary income is 1,000 shares x $11 = $11,000.

Question 14

Bad Brad received 20 NQOs (each option gives him the right to purchase 30 shares of stock for $12 per share)from his employer. At the time he started working, the stock price was $11 per share. Now that the share price is $25 per share, he exercises all of the options. Two years later Bad Brad sells the stock for $27 per share. What is Bad Brad's basis in his stock for purposes of calculating the gain or loss at the time of the sale?
A)$7,200
B)$7,800
C)$15,000
D)$16,200

Accepted Answer

The answer of Bad Brad received 20 NQOs (each option...

Question 15

Maren received 12 NQOs (each option gives her the right to purchase 13 shares of stock for $10 per share)at the time she started working when the stock price was $8 per share. When the share price was $17 per share, she exercised all of her options. Eighteen months later she sold all of the shares for $22 per share. How much gain will Maren recognize on the sale of the shares and how much tax will she pay assuming her marginal tax rate is 37 percent?
A)$0 gain and $0 tax
B)$780 gain and $156 tax
C)$780 gain and $289 tax
D)$1,872 gain and $374 tax

Accepted Answer

The answer of Maren received 12 NQOs (each option gives...

Question 16

Which of the following statements regarding restricted stock is false?
A)Like stock options, restricted stock has to vest before it can be sold.
B)Like nonqualified stock options, the employee's income inclusion for restricted stock is the bargain element.
C)Even if the value of restricted stock decreases from the price on the grant date, it retains some value to the employee.
D)There are no effective tax planning elections for restricted stock.

Accepted Answer

The answer of Which of the following statements regarding restricted...

Question 17

Tom recently received 2,180 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?
A)$0
B)$2,180 loss
C)$4,360 gain
D)$4,360 loss

Accepted Answer

The answer of Tom recently received 2,180 shares of restricted...

Question 18

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 of the shares and how much tax will she pay assuming her marginal tax rate is 37 percent?
A)$0 gain and $0 tax
B)$500 gain and $100 tax
C)$500 gain and $185 tax
D)$1,200 gain and $240 tax

Accepted Answer

The answer of Maren received 10 NQOs (each option gives...

Question 19

Which of the following is not a purpose of equity-based compensation?
A)Provides both risk and incentives to employees
B)Motivates employees by aligning employee and employer incentives
C)Avoids compensation limits for certain publicly traded company executives
D)Provides a low- or no-cost form of compensation

Accepted Answer

Equity-based compensation, such as stock options or restricted stock units, does have a cost to the company, including dilution of existing shareholders and potential impact on the company's financial statements. It is not considered a low- or no-cost form of compensation.

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. What is the amount of Maren's bargain element?
A)$0
B)$700
C)$900
D)$1,500
E)None of the choices are correct.

Accepted Answer

The answer of Maren received 10 NQOs (each option gives...

Quiz 12: Compensation

For compensation plans adopted by a publicly traded company in the current year, when a CEO's salary exceeds $1,000,000, the employee taxed on the entire amount, and the employer allowed a deduction on the entire amount.

How is the bargain element for a stock option calculated?

Which of the following statements is true regarding the $1,000,000 limit on covered employees for publicly traded companies?

Which of the following is true regarding stock options?

Which of the following pairs of items is not needed to calculate the after-tax proceeds for a same-day sale?

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

Which of the following is false regarding a section 83(b) election?

Which of the following refers to the date stock options are awarded to an employee?

Which of the following statements regarding restricted stock is false?

Which of the following is not a purpose of equity-based compensation?