Chapter 12

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Liberty University *

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401

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Accounting

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Apr 3, 2024

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Chapter 12  How are salaries and wages taxed? – they are taxed when received, rather than when earned; they are subject to FICA tax; they are taxed as ordinary income  Which of the following statements is INCORRECT regarding the timing of employer deductions for compensation and the employees' inclusion of compensation in gross income? – employers must deduct the compensation the same year that the employees include the amounts in gross income regardless of the accounting method  ___-___ compensation can provide motivational effects to employees and cash flow benefits to the company. – equity-based  Which of the following choices are characteristics of stock options? – employees may exercise their options by paying the strike price to the employer anytime between vesting and expiration dates; employees may choose NOT to exercise their options if the market value of the shares is below the strike price  The difference between the exercise price and the market value of the acquired shares on the date of exercise is called the ___ ___. – bargain element  The type of compensation where employees receive a fixed amount regardless of the amount of hours worked is called a(n) ___. The type of compensation that is based on the number of hours worked is called ____. Both types of compensation are taxed at to employees as ___ income and are subject to ___ tax which includes Social Security and Medicare. – salary; wages; ordinary; FICA  For both incentive stock options and nonqualified stock options, there are no tax consequences on either the ___ date or the ___ date. – grant; vest  Which of the following statements is correct regarding employers' treatment of salaries and wages? – employers using the accrual method of accounting must deduct salaries and wages in the year the employees earn compensation  Which of the following choices is NOT an advantage of equity-based compensation? – equity- based compensation is exempt from taxation for the employees  Van Winkle received stock options from his employer, RiP, Inc. The options entitled Van to purchase 100 shares of RiP common stock at an exercise price of $20 per share. The options vested when the market price of the stock was $32 per share. Van exercised his options on the vesting date. He sold the stock several months later for $38 per share. What is the total bargain element on Van's stock? – 1200 (32-20)*100  Which of the following statements is correct when describing the tax treatment to the employees of stock options? – there is no tax consequences on the grant date or the vesting date for both ISOs and NQOs  Van Winkle received nonqualified stock options (NQOs) from his employer, RiP, Inc. The options entitled Van to purchase 100 shares of RiP common stock at an exercise price of $20 per share. The options vested when the market price of the stock was $32 per share. Van exercised his options on the vesting date. He sold the stock two years later for $48 per share. Which of the following choices is correct? – Van’s gain on the sale will be a 1600 long-term gain recognized on the sale date  Why do employees prefer ISOs to NQOs? - Employees who meet the required holding period for the ISOs will treat the difference between the sales proceeds and exercise price as a long-term capital gain  What is the tax treatment of incentive stock options for employers? – the employer does NOT receive a tax deduction for incentive stock options  Employees who receive compensation in the form of ___ stock do not have to pay for it, but forfeit ownership if they quit before the ___ date. – restricted; vesting

 Employees receiving restricted stock are taxed on the fair market value of the shares on the ___ date (absent an election). – vesting  The bargain element is taxed as ordinary income on the exercise date for __ stock options, but NOT for ___ stock options unless specific required holding periods are not met. – NQO; ISO  Van Winkle received incentive stock options (ISOs) from his employer, RiP, Inc. The options entitled Van to purchase 100 shares of RiP common stock at an exercise price of $20 per share. The options vested when the market price of the stock was $32 per share. Van exercised his options on the vesting date. He sold the stock two years later for $48 per share. Assuming he meets the required holding periods to qualify for the tax treatment afforded incentive stock options, which of the following choices is correct? – Van’s gain on the sale will be 2800 long-term capital gain  What is the tax treatment of nonqualified stock options for employers? – the employer deducts the bargain element of the option on the date the employer exercises his/her options  Which of the following choices is a characteristic of restricted stock? – the employee is not required to pay for the stock but rather is given the shares on the grant date  Which of the following statements is INCORRECT when describing the advantages and disadvantages of making a Section 83(b) election for restricted stock? – the market value of the stock is taxed at the lower capital gains rate on the grant date  Stock options – employees must use cash to purchase the employer’s stock once the vesting date is reached  Restricted stock – employees receive the stock on the vesting date without having to pay for it  How is the amount of the employer's tax deduction for restricted stock determined? – the amount of the deduction equals the ordinary income that is recognized by the employees  Van Winkle received nonqualified stock options (NQOs) from his employer, RiP, Inc. The options entitled Van to purchase 100 shares of RiP common stock at an exercise price of $20 per share. The options vested when the market price of the stock was $32 per share. Van exercised his options on the vesting date. He sold the stock two years later for $48 per share. Which of the following choices is correct? – Van’s gain on the sale will be a 1600 long-term capital gain recognized on the sale date  Employees prefer to receive ISOs rather than NQOs because any gain on the subsequent sale of the stock may be taxed as a long-term capital gain if the required holding periods are met. – true  Which one of the following characteristics applies to taxable fringe benefits? – the cost of the taxable fringe benefit is deductible to the employer, not the value of the benefit to the employee  By making a Section 83(b) election, the employee is taxed on the value of the restricted stock on the ___ date, rather than the ___ date. – grant; vesting  What is the tax treatment for the employer when restricted stock is granted to employees? – the deduction equals the ordinary income recognized by the employee and the timing is based on whether or not Sec. 83(b) is elected  Which of the following characteristics apply to taxable fringe benefits? – employees are taxed on the value of the benefit, rather than the cost paid for the benefit; employers treat the taxable fringe benefits the same as cash compensation; the cost of the taxable fringe benefit is deductible to the employer, not the value of the benefit to the employee  Taxable fringe benefits are subject to both federal ___ tax and ___ tax. – income; FICA  Which of the following fringe benefits are nontaxable fringe benefits for the recipient? – providing mass transit passes to employees who take the subway to work; the cost of lodging provided to an apartment manager who is required to live on the premises

 A ___ ___ allows employees to choose their fringe benefit package up to a determined amount from a menu of options. The employee may receive cash in lieu of forgone benefits. – cafeteria plan  Which one of the following characteristics applies to taxable fringe benefits? – the cost of the taxable fringe benefit is deductible to the employer, not the value of the benefit to the employee  Concerning employees, which of the following statements is INCORRECT when considering fringe benefits? – taxable fringe benefits are generally available to all employees on a nondiscriminatory basis  A small benefit received from working in a company, such as the freedom to make a few personal copies or use the fax machine, is referred to as a: - de minimis fringe benefit  Accounts in which employees are allowed to set aside a portion of their before-tax salary to pay either health and/or dependent-care benefits are called: - flexible spending accounts  What is the advantage of having a cafeteria plan over a standard package of benefits? – in a cafeteria plan, the employee can choose the benefits that are best suited to his or her situation  Nontaxable fringe benefits are very attractive to employees because their after-tax cost for these benefits is ___. The cost of the benefits is ___ (nondeductible/deductible) for the employer. – zero; deductible  Tyler earns $80,000 per year and has a 22 percent marginal tax rate. His employer is willing to provide health insurance coverage for Tyler if he will agree to a salary reduction. The insurance will cost the employer $4,680. How much salary should Tyler be willing to forgo to receive the $4,680 in health insurance coverage? – 6000 (4680/(1-.22))  Which one of the following statements is INCORRECT when referring to flexible spending accounts (FSAs)? – any money in the account at year end may be withdrawn and is taxable to the employee when received  Why are nontaxable fringe benefits attractive to both the employer and the employees? – the net after-tax cost to employees is zero and the employer receives a tax deduction for the cost of the benefit  Tyler has a 24 percent marginal tax rate. His employer is willing to provide health insurance coverage for Tyler if he will agree to a salary reduction. The insurance will cost the employer $5,040. If Tyler pays that same amount for health insurance premiums, he will need $7,000 in order to pay the premiums and the taxes on the compensation. How much of a cash flow savings is available to the company if it pays $5,040 for Tyler's health insurance, rather than $7,000 in compensation assuming the company has a 21 percent tax rate? – 1548 ((7000-5040)*(1-.21))  Which of the following nontaxable fringe benefits have a maximum dollar amount that is NOT subject to tax? – dependent care benefits; employee educational assistance; qualified transportation fringe benefits  Which of the following fringe benefits are nontaxable fringe benefits for the recipient? – employer-paid premiums on a $50000 group-term life insurance policy; the cost of meals and lodging that is for the convenience of the employer; employer-paid health insurance

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