This preview has intentionally blurred parts. Sign up to view the full document

View Full Document

Unformatted Document Excerpt

19 CHAPTER DEFERRED COMPENSATION Instructor: The test items in both the print Test Bank and ExamView test-creation software are numbered by question type within each chapter. Thus, users of ExamView can more easily preview their selections using the printed Test Bank in the same numbering system. Learning Objective, Level of Difficulty, Estimated Time to Completion, and the AACSB's and AICPA's Core Competencies for each test item are located within the item itself. Question/ Problem Status: Present Edition Q/P in Prior Edition Topic TRUE OR FALSE 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 Higher compensation and performance Profit sharing plan Qualified pension plan Deferred compensation and ISOs Group term life insurance and deferred compensation Defined benefit plan and forfeitures Defined contribution plan Profit sharing plan: separate accounts Participation requirement of qualified plan Cliff vesting Minimum required distribution Maximum benefits payable Annual compensation limit Profit sharing plan: employer deduction 10% excise tax on nondeductible contributions Maximum deduction to stock bonus plan Section 401(k) plan: tax deferral of earnings Section 401(k) plan: maximum contribution Section 401(k) plan: early distributions SEP: limit on employer contributions and employee deferrals Traditional IRA: excess contributions and age Traditional IRA: basis Traditional IRA phaseout: active participant Nondeductible traditional IRA contributions Roth IRA: maximum contribution Roth IRA: contribution deadline 19-1 Unchanged Unchanged Unchanged Unchanged Unchanged Unchanged Unchanged Unchanged Unchanged Unchanged Unchanged Modified Modified Modified Unchanged Unchanged Unchanged Modified Unchanged Modified Unchanged Unchanged Modified Unchanged Unchanged Unchanged 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 19-2 2010 Annual Edition/Test Bank Status: Present Edition Unchanged Unchanged Unchanged Unchanged New New New New New New New New New Unchanged Unchanged Unchanged Q/P in Prior Edition 27 28 29 30 Question/ Problem 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 Topic Roth IRA: contributions Roth IRA: distributions Roth IRA: distributions Coverdell Education Savings Account: contributions Distribution of CESA Ceiling for SEP plan Spousal IRA Excess contributions to traditional IRA Basis in a traditional IRA Limit on total contribution to IRAs Roll over of traditional IRA into Roth NQDC forfeitability $1 million compensation limit ISO: grant date and vesting date Taxation of ISOs ISO: disadvantage MULTIPLE CHOICE 40 41 42 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 Qualified plans Deferred compensation Fringe benefits Defined contribution plan Profit sharing plan Highly compensated employee Graded vesting rule Cliff vesting rule Graded vesting rule Minimum distribution Distributions: early Distributions: excise tax on early distributions Profit sharing plan: deductible contribution and carryover Contributions: profit sharing plan for self-employed Deduction: profit sharing plan Section 401(k) plan SIMPLE plan Keogh plan Traditional IRA: phaseout of deductible contributions Roth IRA: phaseout Traditional IRA: amount deductible Roth IRA: distribution SEP Coverdell Education Savings Account: distributions Coverdell Education Savings Account: distributions Coverdell Education Savings Account: phaseout Traditional IRA: penalty tax on excess contribution Unchanged Unchanged Unchanged Unchanged Modified Modified Unchanged Unchanged Unchanged Unchanged Unchanged New New New New Modified Unchanged Unchanged Unchanged Modified Unchanged New New Unchanged Unchanged Unchanged New 1 2 3 4 5 6 7 8 9 10 11 16 17 18 19 20 21 24 25 26 Deferred Compensation Status: Present Edition New Unchanged Unchanged Unchanged Unchanged Unchanged Unchanged Unchanged Unchanged Unchanged Unchanged Unchanged Unchanged Unchanged Unchanged Unchanged Unchanged Unchanged Unchanged Unchanged 19-3 Q/P in Prior Edition 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 Question/ Problem 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 Topic Golden parachute payments Golden parachute payment Golden parachute payment Golden parachute payment $1 million limit on executive compensation $1 million limit on executive compensation Section 83(b) election Section 83 property Section 83 property and election Section 83 property Section 83 property and election Section 83 property and election Incentive stock option Nonqualified stock option Nonqualified stock option Nonqualified stock option Nonqualified stock option Section 401(k) versus IRA Section 401(k) versus IRA Roth IRA PROBLEMS 1 2 3 4 5 6 7 8 Defined benefit plan Defined benefit plan Section 401(k) excess contributions Keogh plan Restricted stock plan Incentive stock options (ISOs) Nonqualified stock option Nonqualified stock options ESSAY Modified Modified New New Unchanged Unchanged Unchanged Unchanged 1 2 5 6 7 8 1 2 3 4 5 6 Cash balance plan Participation test SEP NQDC: special election for restricted property NQDC: ascertainable FMV IRA versus 401(k) plan New Unchanged Unchanged Unchanged Unchanged Unchanged 2 3 4 5 6 19-4 TRUE/FALSE 2010 Annual Edition/Test Bank 1. Higher compensation does not necessarily guarantee commensurate performance. Register to View AnswerOBJ: 1 MSC: 2 min PTS: 1 DIF: 1 REF: p. 19-2 | p. 19-3 NAT: AICPA FN-Measurement | AACSB Analytic 2. Contributions to a profit sharing plan are immediately deductible by the employer. Register to View AnswerOBJ: 3 MSC: 2 min PTS: 1 DIF: 1 REF: p. 19-3 | p. 19-12 NAT: AICPA FN-Reporting | AACSB Analytic 3. Income earned by a qualified pension plan trust grows at a tax-free rate. Register to View AnswerOBJ: 3 MSC: 2 min PTS: 1 DIF: 1 REF: p. 19-3 | p. 19-12 NAT: AICPA FN-Reporting | AACSB Analytic 4. An incentive stock option (ISO) plan is not considered to be a deferred compensation arrangement. Register to View AnswerISOs are a type of deferred compensation. PTS: 1 OBJ: 1 MSC: 2 min DIF: 1 REF: p. 19-3 | p. 19-4 NAT: AICPA FN-Reporting | AACSB Analytic 5. Group term life insurance is considered to be a type of deferred compensation. Register to View AnswerGroup term life insurance is considered to be a fringe benefit. PTS: 1 DIF: 1 REF: p. 19-4 NAT: AICPA FN-Reporting | AACSB Analytic OBJ: 1 MSC: 2 min 6. Forfeitures may be allocated to the accounts of the remaining participants in a defined benefit plan. Register to View AnswerForfeitures in a defined benefit plan must reduce subsequent funding costs. PTS: 1 OBJ: 3 MSC: 2 min DIF: 1 REF: Concept Summary 19.1 NAT: AICPA FN-Reporting | AACSB Analytic 7. Defined contribution plans are generally more favorable to younger employees. Register to View AnswerOBJ: 3 MSC: 2 min PTS: 1 DIF: 1 REF: Concept Summary 19.1 NAT: AICPA FN-Measurement | AACSB Analytic Deferred Compensation 8. In a profit sharing plan, a separate account is not maintained for each participant. Register to View AnswerSeparate accounts are maintained for each participant in a profit sharing plan. PTS: 1 OBJ: 2 MSC: 2 min DIF: 1 REF: p. 19-6 | Concept Summary 19.1 NAT: AICPA FN-Reporting | AACSB Analytic 19-5 9. A qualified plan must provide, at a minimum, that all employees in the covered group who are 21 years of age are eligible to participate after completing one year of service. Register to View AnswerOBJ: 2 MSC: 2 min PTS: 1 DIF: 1 REF: p. 19-8 NAT: AICPA FN-Reporting | AACSB Analytic 10. Cliff vesting minimizes administrative expenses for a company and provides more vesting for long-term employees. Register to View AnswerOBJ: 2 MSC: 2 min PTS: 1 DIF: 1 REF: p. 19-9 NAT: AICPA FN-Measurement | AACSB Analytic 11. A failure to make a minimum required distribution to a participant in any taxable year results in a 10% nondeductible excise tax on any excess of the amount that should have been distributed over the amount that actually was distributed. Register to View AnswerThe correct percentage is 50%. PTS: 1 DIF: 1 REF: p. 19-11 NAT: AICPA FN-Measurement | AACSB Analytic OBJ: 2 MSC: 2 min 12. A defined benefit plan must reduce the $195,000 (in 2009) maximum benefits payable by one-tenth for each year of participation under 10 years that an employee has performed. Register to View AnswerA one-tenth reduction for each year of participation under 10 years is required. PTS: 1 DIF: 1 REF: p. 19-14 NAT: AICPA FN-Measurement | AACSB Analytic OBJ: 4 MSC: 2 min 13. The amount of the employee's annual compensation that can be taken into account under a qualified plan is limited to $225,000 in 2009. Register to View AnswerThe amount for 2009 is $245,000. PTS: 1 DIF: 1 REF: p. 19-14 NAT: AICPA FN-Measurement | AACSB Analytic OBJ: 4 MSC: 2 min 19-6 2010 Annual Edition/Test Bank 14. For an employee earning $245,000 in 2009, the employer can deduct $49,000 for contributions to a profit sharing plan. Register to View AnswerThe indexed ceiling for contributions to a profit sharing plan is $49,000 in 2009. PTS: 1 DIF: 1 REF: p. 19-15 NAT: AICPA FN-Measurement | AACSB Analytic OBJ: 4 MSC: 2 min 15. A 10% excise tax is imposed on the employee for nondeductible contributions to qualified plans. Register to View AnswerThe 10% excise tax is imposed on the employer. PTS: 1 DIF: 1 REF: p. 19-15 NAT: AICPA FN-Measurement | AACSB Analytic OBJ: 4 MSC: 2 min 16. The maximum deduction permitted each year for contributions to stock bonus plans is 100% of the compensation paid or accrued with respect to plan participants. Register to View AnswerThe correct percentage is 25%. PTS: 1 DIF: 1 REF: p. 19-15 NAT: AICPA FN-Measurement | AACSB Analytic OBJ: 4 MSC: 2 min 17. Although a 401(k) plan avoids taxation on any employer contributions, any income earned on such contributions is taxed yearly. Register to View AnswerEarnings on 401(k) plans are tax deferred until distributions are received. PTS: 1 OBJ: 4 MSC: 2 min DIF: 1 REF: p. 19-15 | Example 12 NAT: AICPA FN-Measurement | AACSB Analytic 18. The maximum annual elective contribution for a participant who is age 40 in a 401(k) plan is $16,500 for 2009. Register to View AnswerOBJ: 4 MSC: 2 min PTS: 1 DIF: 1 REF: p. 19-16 NAT: AICPA FN-Measurement | AACSB Analytic 19. There is a 10% penalty for all early withdrawals from a 401(k) plan. Register to View AnswerEarly withdrawals are possible for early retirement (age 55 or over) and to pay for medical expenses. PTS: 1 OBJ: 4 MSC: 2 min DIF: 1 REF: Concept Summary 19.4 NAT: AICPA FN-Measurement | AACSB Analytic Deferred Compensation 20. If an employer's contribution to a SEP IRA is less than $49,000 in 2009 (or 25% of the employee's earned income, if less), the employee can contribute the difference. 19-7 Register to View AnswerA SEP is a qualified plan. The limit on an employer's contribution for a particular employee is the smaller of $49,000 (in 2009) or 25% of the employee's earned income. However, elective employee deferrals are subjected to a statutory ceiling of $16,500 (in 2009). PTS: 1 OBJ: 6 MSC: 5 min DIF: 1 REF: p. 19-24 | Concept Summary 19.2 NAT: AICPA FN-Measurement | AACSB Analytic 21. Traditional IRA contributions made after an individual reaches the age of 59 1/2 are treated as excess contributions and are subject to a nondeductible 6% excise penalty tax. Register to View AnswerSuch treatment is applicable if contributions are made after the individual reaches age 70 1/2. PTS: 1 DIF: 1 REF: p. 19-26 NAT: AICPA FN-Measurement | AACSB Analytic OBJ: 6 MSC: 2 min 22. A participant has an adjusted basis of $0 in any nondeductible contributions to a traditional IRA. Register to View AnswerFor deductible contributions, the adjusted basis is zero. For nondeductible contributions, the basis for a traditional IRA is equal to the amount of the contributions. PTS: 1 DIF: 1 REF: p. 19-26 NAT: AICPA FN-Measurement | AACSB Analytic OBJ: 6 MSC: 2 min 23. If a married taxpayer is an active participant in another qualified retirement plan, the traditional IRA deduction phaseout begins at $89,000 of AGI for a joint return in 2009. Register to View AnswerPTS: 1 DIF: 1 REF: p. 19-21 | Table 19.3 | Concept Summary 19.3 NAT: AICPA FN-Measurement | AACSB Analytic OBJ: 6 MSC: 2 min 24. If an individual is ineligible to make a deductible contribution to a traditional IRA, nondeductible contributions cannot be made to a traditional IRA. Register to View AnswerNondeductible contributions up to the statutory limit of $5,000 in 2009 (assuming not eligible for catch up provision) can be made. PTS: 1 DIF: 1 REF: p. 19-22 NAT: AICPA FN-Measurement | AACSB Analytic OBJ: 6 MSC: 2 min 19-8 2010 Annual Edition/Test Bank 25. The maximum annual contribution to a Roth IRA for an unmarried taxpayer who is age 35 is the smaller of $5,000 or the individual's compensation for the year. Register to View AnswerThe normal statutory limits apply to the Roth IRA as well as to a traditional IRA. PTS: 1 DIF: 1 REF: p. 19-22 NAT: AICPA FN-Measurement | AACSB Analytic OBJ: 6 MSC: 2 min 26. Contributions to a Roth IRA can be made up to the due date (including extensions) of the taxpayer's income tax return. Register to View AnswerContributions to a Roth IRA can be made up to the due date (excluding extensions) of the taxpayer's income tax return. PTS: 1 DIF: 1 REF: p. 19-22 NAT: AICPA FN-Measurement | AACSB Analytic OBJ: 6 MSC: 2 min 27. An individual, age 40, who is not subject to the phase-out provision may contribute a deductible amount to a Roth IRA up to $5,000 per year in 2009. Register to View AnswerThe $5,000 maximum contribution in 2009 to a Roth IRA is not deductible. Contributions to a Roth IRA are never deductible. PTS: 1 DIF: 1 REF: p. 19-22 NAT: AICPA FN-Measurement | AACSB Analytic OBJ: 6 MSC: 2 min 28. A participant who is at least age 59 1/2 can make a tax-free qualified withdrawal from a Roth IRA after a five-year holding period. Register to View AnswerOBJ: 6 MSC: 2 min PTS: 1 DIF: 1 REF: p. 19-22 NAT: AICPA FN-Measurement | AACSB Analytic 29. Distributions from a Roth IRA that are subject to taxation are treated first as from earnings and last as from contributions. Register to View AnswerWithdrawals from a Roth IRA that are subject to taxation are treated as from contributions (i.e., tax-free return of capital) first and from earnings last. PTS: 1 DIF: 1 REF: p. 19-23 NAT: AICPA FN-Measurement | AACSB Analytic OBJ: 6 MSC: 2 min 30. Low- and middle-income taxpayers may make nondeductible contributions up to $2,000 per child per year to a Coverdell Education Savings Account (CESA). Register to View AnswerOBJ: 6 MSC: 2 min PTS: 1 DIF: 1 REF: p. 19-24 NAT: AICPA FN-Measurement | AACSB Analytic Deferred Compensation 19-9 31. The balance in a Coverdell Education Savings Account (CESA) must be distributed within one year after the death of the beneficiary or one year after the beneficiary reaches age 30. Register to View AnswerThe time limit is 30 days. PTS: 1 DIF: 1 REF: p. 19-24 NAT: AICPA FN-Measurement | AACSB Analytic OBJ: 6 MSC: 5 min 32. Elective deferrals under a Simplified Employee Pension Plan (SEP) are subject to a statutory ceiling of $16,500 in 2009. Register to View AnswerOBJ: 6 MSC: 2 min PTS: 1 DIF: 1 REF: p. 19-24 NAT: AICPA FN-Measurement | AACSB Analytic 33. If only one spouse is employed, both spouses may contribute a maximum of $5,000 to an IRA if the employed spouse has compensation of at least $10,000. Register to View AnswerOBJ: 6 MSC: 2 min PTS: 1 DIF: 1 REF: p. 19-25 NAT: AICPA FN-Measurement | AACSB Analytic 34. A cumulative nondeductible 10% excise penalty tax is imposed on excess contributions to an IRA. Register to View AnswerThe rate is 6%, which is imposed on the smaller of 1) any excess contributions or 2) the fair market value of the plan assets determined as of the close of the tax year. PTS: 1 DIF: 1 REF: p. 19-26 NAT: AICPA FN-Measurement | AACSB Analytic OBJ: 6 MSC: 2 min 35. A participant has a zero basis in the deductible contributions made to a traditional IRA. Register to View AnswerOBJ: 6 MSC: 2 min PTS: 1 DIF: 1 REF: p. 19-26 NAT: AICPA FN-Measurement | AACSB Analytic 36. The total of traditional deductible, traditional nondeductible, and Roth IRA contributions may not exceed $5,000 per year for a taxpayer age 39. Register to View AnswerPTS: 1 DIF: 1 REF: p. 19-28 | Concept Summary 19.3 OBJ: 6 NAT: AICPA FN-Measurement | AACSB Analytic MSC: 2 min 19-10 2010 Annual Edition/Test Bank 37. A traditional IRA may not be rolled over into a Roth IRA. Register to View AnswerA traditional IRA may be rolled over or converted to a Roth IRA. However, this transaction is subject to taxation. PTS: 1 DIF: 1 REF: p. 19-29 NAT: AICPA FN-Measurement | AACSB Analytic OBJ: 6 MSC: 2 min 38. Generally, funded nonqualified deferred compensation plans must be forfeitable to keep the compensation payments from being taxable immediately. Register to View AnswerOBJ: 7 MSC: 2 min PTS: 1 DIF: 1 REF: p. 19-30 NAT: AICPA FN-Measurement | AACSB Analytic 39. The $1 million deduction limitation on executive compensation is decreased by any nondeductible golden parachute payments made to an employee during the same year. Register to View AnswerOBJ: 7 MSC: 2 min PTS: 1 DIF: 1 REF: p. 19-32 NAT: AICPA FN-Measurement | AACSB Analytic 40. For an ISO, there are no tax consequences to the executive on the grant date or the vesting date. Register to View AnswerOBJ: 9 MSC: 2 min PTS: 1 DIF: 1 REF: p. 19-36 to 19-39 NAT: AICPA FN-Measurement | AACSB Analytic 41. For regular income tax purposes, executives report gross income when ISOs are exercised, even if the ISOs are not immediately sold. Register to View AnswerThe spread (the difference between the exercise price and the fair market value at the date of exercise) on an ISO is only subject to the AMT. PTS: 1 DIF: 1 REF: p. 19-36 NAT: AICPA FN-Measurement | AACSB Analytic OBJ: 9 MSC: 2 min 42. A major disadvantage of an ISO is that the employee must recognize ordinary income on the exercise of the option or at the date of grant without receiving cash to pay the tax. Register to View AnswerThis is a disadvantage of a NQSO. PTS: 1 DIF: 1 REF: p. 19-39 NAT: AICPA FN-Measurement | AACSB Analytic OBJ: 9 MSC: 2 min Deferred Compensation MULTIPLE CHOICE 1. Which is not an advantage of a qualified pension or profit sharing plan? a. Employer contributions are not subject to FICA and FUTA taxes. b. Contributions are deductible by the employer when distributed to the participants. c. Employees are not taxed until the funds are distributed to them. d. Income earned by the plan trust grows at a tax-free rate. e. All of the above are advantages. Register to View AnswerContributions are deductible immediately rather than when distributed to the participants. PTS: 1 DIF: 1 REF: p. 19-3 NAT: AICPA FN-Measurement | AACSB Analytic 2. Which is not considered to be a type of deferred compensation? a. 401(k) plan. b. Incentive stock option (ISO) plan. c. Tax-deferred annuities. d. Company-supplied automobile. e. All of the above are types of deferred compensation. Register to View AnswerA company-supplied automobile is a fringe benefit. PTS: 1 OBJ: 1 MSC: 5 min DIF: 1 REF: p. 19-3 | p. 19-4 NAT: AICPA FN-Reporting | AACSB Analytic OBJ: 1 MSC: 5 min 19-11 3. Which is not considered to be a fringe benefit? a. Employee stock purchase plan. b. Group term life insurance. c. Group legal services. d. Qualified transportation benefit. e. All of the above are fringe benefits. Register to View AnswerAn employee stock purchase plan is a type of deferred compensation arrangement. PTS: 1 DIF: 1 REF: p. 19-4 NAT: AICPA FN-Reporting | AACSB Analytic OBJ: 1 MSC: 5 min 4. Which of the following characteristics does not describe a defined contribution plan? a. Includes a money purchase plan. b. An account for each participant is established. c. Exempt from funding requirements. d. Subject to PBGC plan termination insurance rules. e. All of the above describe a defined contribution plan. 19-12 Register to View AnswerDescribes a defined benefit plan. PTS: 1 OBJ: 1 MSC: 5 min 2010 Annual Edition/Test Bank DIF: 1 REF: p. 19-4 | p. 19-5 | Concept Summary 19.1 NAT: AICPA FN-Reporting | AACSB Analytic 5. Color, Inc., has a profit sharing plan with some participants earning $245,000 or more. They can maximize these participants' annual additions by using what percentage profit sharing contribution? a. 10%. b. 15%. c. 20%. d. 25%. e. Some other percentage. Register to View Answer20%. An employer with participants earning $245,000 or more can maximize their annual additions to the plan by a 20% profit sharing contribution ($245,000 20% = $49,000). Note that, for 2009, the $245,000 is the maximum compensation that can be taken into account, and the $49,000 is the maximum annual contribution to a defined contribution plan. PTS: 1 OBJ: 1 | 4 MSC: 5 min DIF: 1 REF: p. 19-15 | Concept Summary 19.1 NAT: AICPA FN-Measurement | AACSB Analytic 6. Paul is a participant in a qualified retirement plan in 2009. In which situation would he be considered highly compensated? a. He owns 4% of the company. b. He receives a total salary of $95,000 from the company. c. He is a member of the top-paid group and receives a salary of $75,000. d. He is vice-president and receives a salary of $55,000. e. None of the above. Register to View AnswerThe compensation threshold is $110,000 and the ownership percentage threshold is 5%. PTS: 1 DIF: 1 REF: p. 19-9 NAT: AICPA FN-Measurement | AACSB Analytic OBJ: 2 MSC: 5 min 7. Zeb has five years of service completed as of February 5, 2009, his employment anniversary date. If his defined benefit plan uses the graded vesting rule, determine Zeb's nonforfeitable percentage. a. 40%. b. 60%. c. 80%. d. 100%. e. None of the above. Register to View AnswerOBJ: 2 MSC: 5 min PTS: 1 DIF: 1 REF: p. 19-9 | Table 19.1 NAT: AICPA FN-Measurement | AACSB Analytic Deferred Compensation 19-13 8. Jane has five years of service completed as of February 5, 2009, her employment anniversary date. If the defined benefit plan uses the cliff vesting schedule, determine Jane's nonforfeitable percentage. a. 0%. b. 60%. c. 80%. d. 100%. e. None of the above. Register to View AnswerUpon completion of not more than five years of service, the employee must have a nonforfeitable right to 100% of his or her accrued benefits if the cliff vesting schedule is used. PTS: 1 DIF: 1 REF: p. 19-9 NAT: AICPA FN-Measurement | AACSB Analytic OBJ: 2 MSC: 5 min 9. Ebony, Inc., uses the three-to-seven-year graded vesting approach for its retirement plan. Pete has five years of service completed as of February 5, 2009, his employment anniversary date. Determine Pete's nonforfeitable percentage. a. 40%. b. 60%. c. 80%. d. 100%. e. None of the above Register to View AnswerOBJ: 2 MSC: 5 min PTS: 1 DIF: 1 REF: p. 19-9 | Table 19.1 NAT: AICPA FN-Measurement | AACSB Analytic 10. Danielle, who is retired, reaches age 70 1/2 in 2009, and she will also be age 71 in 2009. She has a $150,000 balance in her traditional IRA. If her life expectancy is 15.3 years, what distribution, if any, must be made by April 1, 2010? a. $0. b. $9,804. c. $19,608. d. $150,000. e. None of the above. Register to View AnswerDanielle must withdraw $9,804 ($150,000/15.3 years) by April 1, 2010 to avoid a penalty. She also must receive another distribution of $9,804 by December 31, 2010. PTS: 1 OBJ: 2 MSC: 5 min DIF: 1 REF: p. 19-10 | Example 6 NAT: AICPA FN-Measurement | AACSB Analytic 19-14 2010 Annual Edition/Test Bank 11. Dana, age 48, is the sole remaining participant of a money purchase pension plan. The plan is terminated and a $240,000 taxable distribution is made to Dana. The early distribution penalty tax, if any, for 2009 is: a. $0. b. $12,000. c. $24,000. d. $30,000. e. None of the above. Register to View Answer$240,000 10% = $24,000. PTS: 1 DIF: 1 REF: p. 19-11 NAT: AICPA FN-Measurement | AACSB Analytic OBJ: 2 MSC: 5 min 12. Phelps, age 67, has accumulated $721,000 in a defined contribution plan, $103,000 of which represents his own contributions. If the entire amount is distributed in 2009, his excise tax on the distribution is: a. $0. b. $10,300. c. $61,800. d. $72,210. e. None of the above. Register to View AnswerThe 100% excise tax on excess distributions has been repealed. Thus, Phelps' excise tax liability on the distribution is $0. PTS: 1 DIF: 1 REF: p. 19-11 NAT: AICPA FN-Measurement | AACSB Analytic OBJ: 2 MSC: 5 min 13. In 2009, McGrady Corporation paid compensation of $44,700 to the participants in a profit sharing plan. McGrady contributed $13,100 to the plan. McGrady's deductible amount and any contribution carryover are as follows: a. $0 deductible; $13,100 carryover. b. $8,940 deductible; $4,160 carryover. c. $11,175 deductible; $1,925 carryover. d. $12,690 deductible; $110 carryover. e. Some other amounts. Register to View AnswerMcGrady's limitation is $11,175 (25% $44,700), and the contribution carryover to 2010 and subsequent years is $1,925. PTS: 1 DIF: 1 REF: p. 19-15 NAT: AICPA FN-Measurement | AACSB Analytic OBJ: 4 MSC: 5 min Deferred Compensation 19-15 14. Jermaine is a self-employed accountant with gross earned income of $130,000 for the tax year (after the deduction for one-half of any self-employment tax). He has a profit sharing plan (e.g., defined contribution plan). What is the maximum amount Jermaine can contribute to his retirement plan? a. $26,000. b. $32,500. c. $44,000. d. $140,000. e. None of the above. Register to View AnswerJermaine may contribute $26,000, which is 20% of $130,000, or 25% ($130,000 $26,000). PTS: 1 OBJ: 5 MSC: 5 min DIF: 1 REF: p. 19-19 | p. 19-20 | Example 18 NAT: AICPA FN-Measurement | AACSB Analytic 15. The compensation paid by Antawn Corporation to the plan participants of a profit sharing plan in 2009 was $41,200. During 2009, Antawn Corporation contributed $10,700 to the plan. Antawn's deductible amount for 2009 is what amount, if any? a. $0. b. $8,240. c. $10,300. d. $10,700. e. None of the above. Register to View AnswerThe limitation for Antawn Corporation for 2009 is $10,300 ($41,200 .25). PTS: 1 DIF: 1 REF: p. 19-15 NAT: AICPA FN-Measurement | AACSB Analytic OBJ: 4 MSC: 5 min 16. A participant, who is age 38, in a cash or deferred arrangement plan [ 401(k)] may contribute up to what amount in 2009? a. $12,000. b. $15,500. c. $16,500. d. $20,500. e. None of the above. Register to View AnswerThe indexed amount for 2009 is $16,500 and for 2008 is $15,500. A taxpayer who is age 38 is not eligible for the $5,000 catch-up amount in 2009. PTS: 1 DIF: 1 REF: p. 19-16 NAT: AICPA FN-Measurement | AACSB Analytic OBJ: 4 MSC: 5 min 19-16 2010 Annual Edition/Test Bank 17. Merrill is a participant in a SIMPLE 401(k) plan, and he elects to contribute 4% of his $40,000 compensation to the account, while his employer contributes 3%. What amount will vest immediately, if any? a. $0. b. $1,200. c. $1,600. d. $2,800. e. None of the above. Register to View AnswerMerrill has elected to contribute $1,600 ($40,000 4%) to his SIMPLE 401(k) plan. His employer will contribute $1,200 ($40,000 3%). Both amounts will vest immediately. PTS: 1 OBJ: 4 MSC: 5 min DIF: 1 REF: p. 19-17 | p. 19-18 NAT: AICPA FN-Measurement | AACSB Analytic 18. Susan is a self-employed accountant with a qualified defined contribution plan (a Keogh plan). She has the following income items for the year: Earned income from self-employment Dividend income Interest income Net short-term capital gain Adjusted gross income $50,000 8,000 2,000 12,000 72,000 What is the maximum amount Susan can deduct as a contribution to her retirement plan in 2009, assuming the self-employment tax rate is 15.3%? a. $9,235. b. $12,000. c. $46,000. d. $46,468. e. None of the above. Register to View AnswerEarned income from self employment Less: self employment tax adjustment ($50,000 .9235 1/2 0.153) Calculated amount The deductible amount is less than the limit of $49,000 in 2009. PTS: 1 OBJ: 5 MSC: 10 min DIF: 2 REF: p. 19-19 | p. 19-20 | Example 17 | Example 18 NAT: AICPA FN-Measurement | AACSB Analytic $50,000 (3,532) $46,468 100% $46,468 Deferred Compensation 19-17 19. Joyce, age 39, and Sam, age 40, who have been married for seven years, are both active participants in qualified retirement plans. Their total AGI for 2009 is $120,000. Each is employed and earns a salary of $65,000. What are their combined deductible contributions to traditional IRAs? a. $0. b. $3,000. c. $4,000. d. $8,000. e. None of the above. Register to View AnswerJoyce and Sam may contribute a total of $10,000 ($5,000 each) to a traditional IRA, but because their AGI exceeds the phaseout ceiling of $99,000 in 2009, $0 is deductible. PTS: 1 OBJ: 6 MSC: 5 min DIF: 1 REF: p. 19-20 | p. 19-21 | Table 19.3 NAT: AICPA FN-Measurement | AACSB Analytic 20. Donna, age 27 and unmarried, is an active participant in a qualified retirement plan. Her AGI is $108,000. What amount, if any, may Donna contribute to a Roth IRA in 2009? a. $0. b. $2,400. c. $3,200. d. $4,000. e. None of the above. Register to View AnswerDonna may contribute $4,000 to a Roth IRA in 2009, calculated as follows: $108,000 AGI $105,000 threshold = $3,000 excess AGI $3,000/$15,000 phaseout range $5,000 = $1,000 phaseout $5,000 maximum contributions $1,000 phaseout = $4,000 contribution ceiling PTS: 1 OBJ: 6 MSC: 10 min DIF: 1 REF: p. 19-22 | p. 19-23 NAT: AICPA FN-Measurement | AACSB Analytic 21. Sammy, age 31, is unmarried and is not an active participant in a qualified retirement plan. His modified AGI is $55,000 in 2009. The maximum amount that Sammy can deduct for a contribution to a traditional IRA is: a. $2,800. b. $3,500. c. $4,000. d. $5,000. e. None of the above. Register to View AnswerSammy can deduct $5,000 because he is not an active participant in a qualified retirement plan. PTS: 1 DIF: 1 REF: p. 19-20 NAT: AICPA FN-Measurement | AACSB Analytic OBJ: 6 MSC: 5 min 19-18 2010 Annual Edition/Test Bank 22. Xijia establishes a Roth IRA at age 34 and contributes the maximum amount per year to the Roth IRA for 32 years. The account is now worth $282,000, consisting of $128,000 in contributions plus $154,000 in accumulated earnings. How much can Xijia withdraw tax free in 2009? a. $0. b. $128,000. c. $154,000. d. $282,000. e. None of the above. Register to View AnswerAssuming Xijia meets the income limitation at the time of the contributions to the Roth IRA, all of the funds may be withdrawn tax-free. She satisfies the five-year holding period for a Roth IRA and is over age 59 1/2 at the time of the distribution. PTS: 1 OBJ: 6 MSC: 5 min DIF: 1 REF: p. 19-22 | Example 23 NAT: AICPA FN-Measurement | AACSB Analytic 23. Dirk has $228,000 of earned income in 2009. The amount he can contribute to a SEP is: a. $22,800. b. $46,000. c. $49,000. d. $61,250. e. None of the above. Register to View Answer25% $245,000 statutory limit = $61,250, but limited to $49,000. PTS: 1 OBJ: 6 MSC: 5 min DIF: 1 REF: p. 19-24 | Concept Summary 19.2 NAT: AICPA FN-Measurement | AACSB Analytic 24. Julie receives a $2,000 distribution from a CESA. On this date, the total balance is $10,000, with $4,000 representing earnings. If her qualified higher education expenses are $2,350, what amount can she exclude from gross income? a. None. b. $800. c. $1,200. d. $2,000. e. Some other amount. Register to View AnswerAll of it is excluded since her qualified higher education expenses exceed $2,000. $1,200 is a return of capital [($6,000/$10,000) x $2,000] and the remaining $800 ($2,000 $1,200) may be excluded. PTS: 1 DIF: 1 REF: p. 19-23 NAT: AICPA FN-Measurement | AACSB Analytic OBJ: 6 MSC: 5 min Deferred Compensation 19-19 25. Harry receives a $10,000 distribution from a CESA. On this date, his total account balance is $16,000, with $4,000 representing earnings. If his qualified higher education expenses are $8,000, the amount included in gross income is: a. None. b. $500. c. $2,000. d. $2,500. e. None of the above. Register to View AnswerA portion of the distribution is treated as a nontaxable return of capital, $7,500 [$10,000 ($12,000/$16,000)]. The balance of $2,500 ($10,000 $7,500) is a distribution of earnings. Since Harry's qualified higher education expenses are less than the $10,000 distribution, a portion of the earnings are taxable. Excludible portion of earnings: ($8,000/$10,000) $2,500 earnings = $2,000. Included in gross income: $2,500 $2,000 = $500. PTS: 1 OBJ: 6 MSC: 5 min DIF: 1 REF: p. 19-23 | Example 26 NAT: AICPA FN-Measurement | AACSB Analytic 26. What is the maximum amount Velvia can contribute to a Coverdell Education Savings Account (CESA) on behalf of a grandson in 2009? She is single with an AGI of $99,000. a. $0. b. $500. c. $1,467. d. $2,000. e. None of the above. Register to View AnswerVelvia may contribute $1,467 to the Coverdell Education Savings Account, calculated as follows: $99,000 AGI $95,000 threshold = $4,000 excess AGI $4,000/$15,000 phaseout range $2,000 = $533 phaseout $2,000 maximum contribution $533 phaseout = $1,467 contribution ceiling PTS: 1 DIF: 1 REF: p. 19-24 NAT: FN-Measurement AICPA | AACSB Analytic OBJ: 6 MSC: 10 min 27. Melissa, age 40, establishes a traditional IRA in 2009 and contributes $5,650 in cash to the plan. She has earned income of $36,200. What is the amount of the penalty tax that Melissa will incur, if any, assuming she keeps the $5,650 in the account? a. $0. b. $39. c. $65. d. $650. e. None of the above. 19-20 Register to View Answer$650 0.06 = $39. PTS: 1 OBJ: 6 MSC: 5 min 2010 Annual Edition/Test Bank DIF: 1 REF: p. 19-26 | Example 30 NAT: AICPA FN-Measurement | AACSB Analytic 28. Arlene, an executive, receives a golden parachute payment of $600,000 from her employer. Her average annual compensation for the past five tax years is $120,000. Which of the following statements is correct? a. The disallowed deduction to the employer is $480,000, and the excise tax to Arlene is $120,000. b. The disallowed deduction to the employer is $480,000, and the excise tax to Arlene is $96,000. c. The disallowed deduction to the employer is $0, and the excise tax to Arlene is $0. d. The disallowed deduction to the employer is $480,000, and the excise tax to Arlene is $0. e. None of the above. Register to View AnswerThe $600,000 amount is reduced by $120,000 to $480,000, which is the disallowed deduction to the employer. The excise tax to Arlene is $96,000 ($480,000 20%). PTS: 1 OBJ: 7 MSC: 5 min DIF: 1 REF: p. 19-32 | Example 37 NAT: AICPA FN-Measurement | AACSB Analytic 29. Which statement is not true with respect to golden parachute payments? a. Refers to excess severance pay. b. Does include payments from a qualified profit sharing plan. c. A deduction is denied to the employer. d. A 20% excise tax is imposed on the recipient. e. All of the above are true. Register to View AnswerOBJ: 7 MSC: 5 min PTS: 1 DIF: 1 REF: p. 19-31 | p. 19-32 NAT: AICPA FN-Measurement | AACSB Analytic 30. Paul, an executive, receives a $600,000 payment under a golden parachute agreement. Paul's base amount from Blue Corporation is $140,000. What amount, if any, is deductible by the corporation? a. $0. b. $140,000. c. $460,000. d. $600,000. e. None of the above. Register to View Answer$140,000. The payment is treated as a golden parachute arrangement because it exceeds $420,000 (3 $140,000). Therefore, Blue Corporation would not be able to deduct $460,000 ($600,000 $140,000) of the payment under 280G. PTS: 1 DIF: 1 REF: p. 19-32 NAT: AICPA FN-Measurement | AACSB Analytic OBJ: 7 MSC: 5 min Deferred Compensation 19-21 31. James, an executive, receives a $600,000 payment under a golden parachute agreement. James' base amount from Silver, Inc., is $140,000. What total tax must James pay, assuming a 35% individual tax rate? a. $0. b. $92,000. c. $210,000. d. $302,000. e. None of the above. Register to View Answer$302,000. James would have a regular income tax liability of $210,000 ($600,000 .35) plus a nondeductible excise tax of $92,000 ($460,000 .20). PTS: 1 DIF: 1 REF: p. 19-32 NAT: AICPA FN-Measurement | AACSB Analytic OBJ: 7 MSC: 5 min 32. Larry negotiates a $2.5 million contract with Red, Inc., a publicly-held corporation, to become their CEO for 2009. What amount is deductible by Red, Inc. in 2009? a. $1,000,000. b. $1,064,000. c. $2,064,000. d. $2,320,000. e. Some other amount. Register to View AnswerThe deduction for the $2.5 million salary is limited to $1 million. PTS: 1 OBJ: 7 MSC: 5 min DIF: 1 REF: p. 19-32 | p. 19-33 NAT: AICPA FN-Measurement | AACSB Analytic 33. Nick negotiates a $4 million contract per year with a major professional football team to become its head coach. What amount is deductible by the company in 2009 his first full year of employment. a. None. b. $1,000,000. c. $2,000,000. d. $4,000,000. e. None of the above. Register to View AnswerSince Nick is not an executive of a publicly-traded corporation, the $1 million limitation does not apply. PTS: 1 OBJ: 7 MSC: 5 min DIF: 1 REF: p. 19-32 | p. 19-33 NAT: AICPA FN-Measurement | AACSB Analytic 19-22 2010 Annual Edition/Test Bank 34. The special 83(b) election (i.e., where income is taxed in the year of the grant) with respect to a restricted stock plan may be advantageous in which of the following situations in 2009? a. The employer is an unstable company. b. The bargain element is relatively small. c. A minimum amount of appreciation is expected in the future. d. The restriction probably will not be satisfied. e. None of the above. Register to View AnswerA small amount of current appreciation will result in the recognition of a small amount of ordinary income in the current year and a large amount of expected future appreciation will be taxed in the future as a capital gain. This result may be advantageous because of the beneficial treatment of capital gains. PTS: 1 OBJ: 8 MSC: 5 min DIF: 1 REF: p. 19-33 to 19-35 NAT: AICPA FN-Measurement | AACSB Analytic 35. On June 15, 2009, Quail Company sells 100 shares of its stock to Tony, an employee, for $100 per share as part of his compensation. The fair market value (FMV) at the time of the transfer is $200 per share. The stock is subject to a substantial risk of forfeiture and nontransferability restrictions through June 15, 2014, at which time the stock is expected to have a FMV of $400 per share. Assume a 35% marginal tax bracket. No 83(b) election is made. What amount is taxable to Tony in 2009? a. $0. b. $5,600. c. $7,200. d. $10,000. e. None of the above. Register to View AnswerThe substantial risk of forfeiture does not lapse until 2014. PTS: 1 OBJ: 8 MSC: 5 min DIF: 1 REF: p. 19-33 | p. 19-34 | Example 38 NAT: AICPA FN-Measurement | AACSB Analytic 36. On June 15, 2009, Quail Company sells 100 shares of its stock to Tony, an employee, for $100 per share as part of his compensation. The fair market value (FMV) at the time of the transfer is $200 per share. The stock is subject to a substantial risk of forfeiture and nontransferability restrictions through June 15, 2014, at which time the stock is expected to have a FMV of $400 per share. Tony makes the 83(b) election. What amount is taxable to Tony in 2009? a. $0. b. $5,600. c. $7,200. d. $10,000. e. None of the above. Register to View Answer$20,000 FMV $10,000 cost = $10,000. The 83(b) election results in immediate recognition. PTS: 1 OBJ: 8 MSC: 5 min DIF: 1 REF: p. 19-34 | p. 19-35 | Example 39 NAT: AICPA FN-Measurement | AACSB Analytic Deferred Compensation 19-23 37. On June 15, 2009, Quail Company sells 100 shares of its stock to Tony, an employee, for $100 per share as part of his compensation. The fair market value (FMV) at the time of the transfer is $200 per share. The stock is subject to a substantial risk of forfeiture and nontransferability restrictions through June 15, 2014, at which time the stock is expected to have a FMV of $400 per share. Tony sells all of his shares for $400 a share in 2014. What is Tony's ordinary income in 2014 [assume no 83(b) election]? a. $0. b. $10,000. c. $20,000. d. $30,000. e. None of the above. Register to View Answer$40,000 amount realized $10,000 adjusted basis = $30,000. PTS: 1 OBJ: 8 MSC: 5 min DIF: 1 REF: p. 19-33 | p. 19-34 | Example 38 NAT: AICPA FN-Measurement | AACSB Analytic 38. On June 15, 2009, Quail Company sells 100 shares of its stock to Tony, an employee, for $100 per share as part of his compensation. The fair market value (FMV) at the time of the transfer is $200 per share. The stock is subject to a substantial risk of forfeiture and nontransferability restrictions through June 15, 2014, at which time the stock is expected to have a FMV of $400 per share. Tony makes the 83(b) election. What amount is taxable to Tony in 2014 when the substantial risks have lapsed? a. $0. b. $10,000. c. $20,000. d. $30,000. e. None of the above. Register to View AnswerZero ordinary income since Tony was taxed in 2009 under the 83(b) election. Tony's capital gain would be $20,000 ($40,000 amount realized $20,000 adjusted basis) if he sold the stock in 2014 for $400 per share. PTS: 1 OBJ: 8 MSC: 5 min DIF: 1 REF: p. 19-34 | p. 19-35 | Example 39 | Example 40 NAT: AICPA FN-Measurement | AACSB Analytic 39. If the special election under 83(b) is made as a result of a restricted property transaction, which statement is false? a. An election must be made within 30 days after receipt of the restricted property. b. Ordinary income is recognized on the excess of the FMV over the amount paid for the property on the date received. c. Any appreciation on the property after receipt is treated as capital gain. d. A deduction is allowed to the employee for any taxes paid on the original amount included in gross income if the property is subsequently forfeited. e. None of the above is false. 19-24 Register to View AnswerNo deduction is allowed. 83(b) PTS: 1 OBJ: 8 MSC: 5 min 2010 Annual Edition/Test Bank DIF: 1 REF: p. 19-34 | p. 19-35 NAT: AICPA FN-Measurement | AACSB Analytic 40. What statement is false with respect to an incentive stock option (ISO)? a. Capital gain is available on disposal. b. The spread is not subject to the alternative minimum tax. c. If the employee meets the holding period requirement, the employer does not obtain a business deduction. d. The spread is the excess of the FMV of the share at the date of exercise over the option price. e. None of the above are false. Register to View AnswerThe spread is subject to the AMT. PTS: 1 DIF: 1 REF: p. 19-36 NAT: AICPA FN-Measurement | AACSB Analytic OBJ: 9 MSC: 5 min 41. Under a nonqualified stock option (NQSO) plan which is granted to Damon on March 15, 2007, he may purchase 200 shares of stock from his employer at $15 per share. At that date, the option does not have a readily ascertainable fair market value. Eight months later on the date of exercise the fair market value of the stock is $20. On December 1, 2009, Damon sells 100 shares for $24 each. Which of the following would be the result of these transactions on the date of exercise and the date of sale? a. Ordinary income of $1,000 and a long-term capital gain of $400. b. Ordinary income of $1,200 and a long-term capital gain of $300. c. Ordinary income of $2,400 and a long-term capital gain of $0. d. Ordinary income of $1,000 and a short-term capital gain of $400. e. None of the above. Register to View AnswerBecause the nonqualified stock option does not have a readily ascertainable fair market value at the date of the grant, Damon must recognize ordinary income of $1,000 ($5 200 shares) at the exercise date. At the sales date, Damon recognizes a long-term capital gain of $400 ($4 100 shares). PTS: 1 OBJ: 9 MSC: 10 min DIF: 2 REF: p. 19-38 | p. 19-39 | Example 47 NAT: AICPA FN-Measurement | AACSB Analytic Deferred Compensation 19-25 42. On February 3, 2007, Samuel is granted nonqualified stock options (NQSOs) for 100 shares of common stock at $10 per share. On the grant date, the stock is selling for $15 per share and the option is selling for $5. He exercises these options on January 3, 2008, when the stock is selling for $18 per share. He sells one-half of the shares on April 15, 2009, and the other half on September 17, 2009. The sale price on both dates is $21 per share. The stock and the stock options are listed on an organized stock exchange. What amount of income, if any, is recognized by Samuel in 2007? a. $0. b. $250 ordinary income. c. $500 capital gain. d. $500 ordinary income. e. None of the above. Register to View Answer$500 ($5 100) of ordinary income is recognized on the grant date. PTS: 1 OBJ: 9 MSC: 5 min DIF: 2 REF: p. 19-38 | p. 19-39 | Example 46 | Example 47 NAT: AICPA FN-Measurement | AACSB Analytic 43. On February 3, 2007, Samuel is granted nonqualified stock options (NQSOs) for 100 shares of common stock at $10 per share. On the grant date, the stock is selling for $15 per share and the option is selling for $5. He exercises these options on January 3, 2008, when the stock is selling for $18 per share. He sells one-half of the shares on April 15, 2009, and the other half on September 17, 2009. The sale price on both dates is $21 per share. The stock and the stock options are listed on an organized stock exchange. What amount of income, if any, is recognized by Samuel in 2009? a. $0. b. $300 long-term capital gain. c. $600 long-term capital gain. d. $1,100 long-term capital gain. e. None of the above. Register to View AnswerAmount realized (50 shares $21) Adjusted basis ($500 + $250) Long-term capital gain $1,050 (750) $ 300 Fifty shares are sold on April 15, 2009, and another 50 shares are sold on September 17, 2009. Thus, the recognized long-term capital gain on each sale is $300. PTS: 1 OBJ: 9 MSC: 10 min DIF: 2 REF: p. 19-38 | p. 19-39 | Example 46 | Example 47 NAT: AICPA FN-Measurement | AACSB Analytic 19-26 2010 Annual Edition/Test Bank 44. On February 3, 2007, Samuel is granted nonqualified stock options (NQSOs) for 100 shares of common stock at $10 per share. On the grant date, the stock is selling for $15 per share and the option is selling for $5. He exercises these options on January 3, 2008, when the stock is selling for $18 per share. He sells one-half of the shares on April 15, 2009, and the other half on September 17, 2009. The sale price on both dates is $21 per share. The stock and the stock options are listed on an organized stock exchange. What amount of income, if any, is recognized by Samuel in 2008? a. $0. b. $250 ordinary income. c. $500 capital gain. d. $500 ordinary income. e. None of the above. Register to View AnswerThere is no recognition on the exercise date in 2008, since recognition did occur in 2007 on the grant date. PTS: 1 OBJ: 9 MSC: 5 min DIF: 1 REF: p. 19-38 | p. 19-39 | Example 46 | Example 47 NAT: AICPA FN-Measurement | AACSB Analytic 45. The following is not considered to be an advantage of a 401(k) plan over an IRA (excluding SIMPLE IRAs). a. Higher contribution limitation. b. Some distributions may be permitted without penalties. c. Distributions are taxed at capital gain rates. d. Favorable ten-year averaging may be available. e. None of the above. Register to View AnswerNeither a 401(k) plan nor an IRA provides for capital gain treatment for distributions. PTS: 1 OBJ: 6 | 10 MSC: 5 min DIF: 1 REF: Concept Summary 19.4 NAT: AICPA FN-Measurement | AACSB Analytic 46. Which of the following is considered an advantage of an IRA over a 401(k) plan? a. Employer involvement is minimal. b. Favorable ten-year averaging may be available. c. Higher contribution limitation. d. Distributions taxed at capital gain rates. e. None of the above. Register to View AnswerOBJ: 6 | 10 MSC: 5 min PTS: 1 DIF: 1 REF: Concept Summary 19.4 NAT: AICPA FN-Measurement | AACSB Analytic Deferred Compensation 47. Which statement is incorrect with respect to a Roth IRA? a. Ordinary income and capital gain inside the Roth are not taxed (if five-year holding period is met). b. Roth IRA allows the tax-free accumulation of wealth. c. All individual taxpayers can contribute to a Roth IRA. d. A traditional IRA can be converted into a Roth IRA. e. None of the above. Register to View AnswerThere are AGI limitations that prevent some individual taxpayers from contributing to a Roth IRA. PTS: 1 OBJ: 6 | 10 MSC: 5 min PROBLEM DIF: 1 REF: p. 19-22 | p. 19-23 | p. 19-29 NAT: AICPA FN-Measurement | AACSB Analytic 19-27 1. Joey has been an active participant in a defined benefit plan for 21 years. During his last 5 years of employment, Joey earned $32,000, $48,000, $55,000, $95,000, and $105,000, respectively (representing his highest-income years). a. b. Calculate Joey's maximum allowable benefits from this qualified plan (assume there are fewer than 100 participants). Assume that Joey's average compensation for his three high years is $200,000. Calculate Joey's maximum allowable benefits. Register to View AnswerThe limitation is the smaller of $195,000 in 2009 (indexed each year) or 100% of the average of his three highest annual salaries: $55,000 + $95,000 + $105,000 3 b. = $85,000 maximum allowable benefit. Smaller of: $195,000 in 2009 (indexed each year) or 100% times highest three years average, or $200,000. Thus, $195,000 is Joey's maximum allowable benefit. DIF: 2 REF: p. 19-14 | Concept Summary 19.1 NAT: AICPA FN-Measurement | AACSB Analytic PTS: 1 OBJ: 4 MSC: 10 min 19-28 2010 Annual Edition/Test Bank 2. Determine the maximum annual benefits payable to a participant from a defined benefit plan in the following independent situations: a. b. Jacob, age 67, has been a participant for 14 years, and his highest average compensation for 3 years is $96,000. Sloane, age 66, has been a participant for 8 years (12 years of service), and her highest average compensation for 3 years is $119,000. Register to View Answer$96,000 in 2009. The maximum allowable benefits payable to Jacob from a defined benefit plan is the smaller of $195,000 in 2009 (indexed each year) or 100% of his average compensation for his highest three years of employment. b. $119,000 in 2009. The defined benefit plan must reduce Sloane's maximum benefit payable [e.g., $195,000 in 2009 (indexed each year)] by one-tenth for each year of participation under 10 years (e.g., $195,000 8/10 = $156,000). Thus, the $119,000 average compensation amount is below the ceiling. DIF: 2 REF: p. 19-14 | Example 8 | Concept Summary 19.1 NAT: AICPA FN-Measurement | AACSB Analytic PTS: 1 OBJ: 4 MSC: 10 min 3. Mahendra, age 37, is an employee of a retail outlet. He defers $18,500 in a 401(k) plan in 2009. Compute any tax ramifications. ANS: The $2,000 excess over the $16,500 limit, along with any appropriate earnings, must be returned to Mahendra by April 15, 2010. This $2,000 excess amount plus related income is taxable to him in 2009 and will be taxed again upon distribution (if made after April 15, 2010). There is a 10% tax on his employer on any excess contributions not returned within 2 1/2 months after the close of the plan year. PTS: 1 OBJ: 4 MSC: 5 min DIF: 1 REF: p. 19-16 | p. 19-17 | Example 14 NAT: AICPA FN-Measurement | AACSB Analytic 4. Yao, a self-employed lawyer, has a profit sharing plan with a contribution rate of 15% of compensation. Yao's earned income after the deduction of one-half of self-employment tax, but before the Keogh contribution, is $260,000. Calculate Yao's maximum contribution in 2009. ANS: The 25% limitation on the employee's contribution is computed on the first $245,000 in 2009 of earned income. Thus, Yao's maximum contribution in 2009 is $36,750 ($245,000 .15X = X; X = $213,043). Therefore, $245,000 $213,043 = $31,957. PTS: 1 OBJ: 5 MSC: 5 min DIF: 2 REF: p. 19-20 | Example 18 NAT: AICPA FN-Measurement | AACSB Analytic Deferred Compensation 19-29 5. On July 1, 2005, Blue Corporation sold 100 of its common shares (worth $15 per share) to its employee Bobby for $5 per share. The sale was subject to Bobby's agreement to resell the shares to the corporation for $5 per share if his employment is terminated within the following four years. The shares had a value of $26 per share on July 1, 2009. He sold the shares for $30 per share on September 15, 2009. No special election under 83(b) was made. Identify the correct Register to View AnswerBobby will be taxed on what amount, if any, on July 1, 2005? (1) Ordinary income of $1,500. (2) Short-term capital gain of $1,500. (3) Long-term capital gain of $1,000. (4) Tax-exempt income of $1,500. (5) None of the above. b. Bobby will be taxed on what amount, if any, on July 1, 2009? (1) Ordinary income of $2,500. (2) Long-term capital gain of $2,500. (3) Ordinary income of $2,100. (4) Long-term capital gain of $2,100. (5) None of the above. c. Bobby will be taxed on what amount, if any, on September 15, 2009? (1) Long-term capital gain of $2,000. (2) Short-term capital gain of $2,000. (3) Long-term capital gain of $400. (4) Short-term capital gain of $400. (5) None of the above. d. Blue Corporation will obtain what deduction, if any? (1) Ordinary deduction of $500 on September 15, 2009. (2) Ordinary deduction of $2,100 on July 1, 2009. (3) Ordinary deduction of $2,500 on September 15, 2009. (4) Ordinary deduction of $500 on July 1, 2009. (5) Ordinary deduction of $1,500 on July 1, 2009. (6) None of the above. e. Assume the same facts, except that Bobby makes an election under 83(b). He will be taxed on what amount, if any? (1) Ordinary income of $1,000 on July 1, 2005. (2) Ordinary income of $1,000 on July 1, 2009. (3) Ordinary income of $2,000 on July 1, 2009. (4) Long-term capital gain of $2,000 on September 15, 2009. (5) None of the above. f. Blue Corporation in e. will obtain what deduction? (1) Ordinary deduction of $1,000 on July 1, 2005. (2) Ordinary deduction of $1,000 on July 1, 2009. (3) Ordinary deduction of $2,000 on July 1, 2009. (4) Ordinary deduction of $2,000 on July 1, 2009. (5) None of the above. 19-30 2010 Annual Edition/Test Bank g. Suppose Bobby under e. above voluntarily terminates his employment on January 3, 2009, and goes into business for himself. (1) Bobby may take a $1,000 deduction on his 2009 tax return. (2) Bobby may apply for a refund of the $1,000 on his 2005 tax return. (3) Blue Corporation must repay the taxes saved on the $1,000 deduction, and Bobby gets no refund of the taxes paid on the $1,000 previously included in gross income. (4) Bobby obtains a $500 loss on the amount he paid for the stock initially when he sells it back to the corporation (i.e., he gets his money back). (5) None of the above. Register to View Answer5; no income recognized given that the resale feature qualifies as a substantial risk of forfeiture. b. c. d. e. f. g. 3; 100 shares ($26 $5) = $2,100 ordinary income. 4; 100 shares ($30 $26) = $400 STCG. 2; deduction in the same amount as Bobby recognized as compensation income ($2,100). 1; 100 shares ($15 $5) = $1,000 on July 1, 2005. 1; deduction equal to what Bobby recognizes as income and at same time ($1,000). 3; no refund of taxes Bobby paid on $1,000 recognized on July 1, 2005 as a result of the special election. Bobby has a $0 gain or loss on the resale of the stock to the corporation. DIF: 3 REF: p. 19-34 | p. 19-35 | Example 39 NAT: AICPA FN-Measurement | AACSB Analytic PTS: 1 OBJ: 8 | 9 MSC: 15 min 6. Mary exercises incentive stock options (ISOs) for 100 shares of Iron Corporation stock at the option price of $100 per share on May 21, 2009, when the fair market value is $120 per share. She sells the 100 shares of stock three and one-half years later for $140. a. b. c. d. e. f. Calculate the recognized gain on the sale and classify it as capital or ordinary. Assume instead Mary holds the stock for only seven months and sells the shares for $140 per share. Calculate the recognized gain on the sale and classify it as capital or ordinary. In b., what amount, if any, can Iron Corporation deduct? Suppose Mary holds the stock for two years and sells the shares for $115 per share. Calculate the recognized gain on the sale and classify it as capital or ordinary. In a., assume the options are nonqualified stock options with a non-ascertainable fair market value on the date of the grant. Calculate the long-term capital gain, if any, in the year of the sale. In e., assume that each option has an ascertainable fair market value of $10 on the date of the grant and no substantial risk of forfeiture exists. Calculate the long-term capital gain, if any, on the date of the sale. Deferred Compensation Register to View Answer100 shares ($140 $100) = $4,000 LTCG. b. c. d. e. 100 shares ($120 $100) = $2,000 ordinary income and $2,000 STCG [100 shares ($140 $120)]. The same amount that Mary recognizes as ordinary income and at the same time, or $2,000, may be deducted by Iron Corporation. $1,500 LTCG [100 shares ($115 $100)]. 100 shares ($140 $120) = $2,000 LTCG. Mary also recognizes ordinary income of $2,000 ($20 100 shares) on the exercise date. 100 shares ($140 $110) = $3,000 LTCG. Mary also recognizes ordinary income of $1,000 ($10 100 shares) on the grant date. 19-31 f. PTS: 1 OBJ: 9 MSC: 15 min DIF: 3 REF: p. 19-36 to 19-39 | Example 43 | Example 45 to 47 NAT: AICPA FN-Measurement | AACSB Analytic 7. On November 19, 2008, Rex is granted a nonqualified stock option to purchase 100 shares of Tan Company. On that date, the stock is selling for $8 per share, and the option price is $9 per share. Rex exercises the option on August 21, 2009, when the stock is selling for $10 per share. Five months later, Rex sells the shares for $11.50 per share. a. b. c. d. e. What amount is included in Rex's gross income in 2008? What amount is included in Rex's gross income in 2009? What amount and type of gain is recognized by Rex in 2010? What amount, if any, is deductible by Tan Company in 2009? What amount, if any, is recognized in 2010 if the stock is sold for $9.50 per share? Register to View AnswerNo gain is recognized on the grant date since the options have no readily ascertainable fair market value. b. $100 ordinary income [($10 $9) 100 shares = $100]. c. $150 short-term capital gain [($11.50 $10) 100 shares = $150]. d. $100 is deductible by Tan Company in 2009, the same amount that is taxed as ordinary income to Rex. e. $50 short-term capital loss [($9.50 $10) 100 shares = $50]. PTS: 1 OBJ: 9 MSC: 15 min DIF: 3 REF: p. 19-38 | p. 19-39 | Example 46 | Example 47 NAT: AICPA FN-Measurement | AACSB Analytic 19-32 2010 Annual Edition/Test Bank 8. On January 1, 2006, Gail (an executive) receives a warrant to purchase one share of stock at $70 and on the same date the fair market value of the stock is $100. The warrant has no restrictions and has a readily ascertainable fair market value on a stock exchange of $30. She exercises the warrant on May 15, 2006, and sells the stock for $200 on December 20, 2009. a. b. c. Calculate the amount Gail would recognize in 2006, if any. Calculate the amount Gail would recognize in 2009, if any. Suppose she sells the warrant in 2010 for $39. What amount would Gail recognize? Register to View AnswerOrdinary income of $30 in 2006. b. c. Long-term capital gain of $100 in 2009 [$200 ($30 + $70)]. Long-term capital gain of $9 ($39 $30) in 2010 on the sale of the warrant. DIF: 2 REF: p. 19-36 | p. 19-38 NAT: AICPA FN-Measurement | AACSB Analytic PTS: 1 OBJ: 8 | 9 MSC: 10 min ESSAY 1. What is a cash balance plan? Register to View Answercash balance plan is a controversial hybrid form of pension plan that is similar in many aspects to a defined benefit plan. These plans are funded by the employer, and the employer bears the investment risks and rewards. Thus, the employer bears the mortality risk if an employee elects to receive benefits in the form of a lifetime annuity and lives beyond normal life expectancy. But like defined contribution plans, a cash balance plan accrues benefits to individual accounts. The benefits for an employee depend on how much builds up over time in the employee's account and not on a formula based on years of service and preretirement pay. Cash balance plans are better for younger, mobile employees, and the companies save money by reducing pension payouts for older and longer-service employees. PTS: 1 DIF: 1 REF: p. 19-7 NAT: AICPA FN-Reporting | AACSB Analytic 2. Explain the participation requirement for a qualified plan. Register to View Answerqualified plan must provide, at a minimum, that all employees in the covered group who are at least 21 years of age are eligible to participate after completing one year of service. A year of service is generally defined as the completion of 1,000 hours of service within a measuring period of 12 consecutive months. As an alternative, where the plan provides that 100% of an employee's accrued benefits will be vested upon entering the plan, the employee's participation may be postponed until the later of age 21 or two years from the date of employment. Once the age and service requirements are met, an employee must begin participating no later than the earlier of the following: OBJ: 1 MSC: 10 min Deferred Compensation 19-33 The first day of the first plan year beginning after the date on which the requirements were satisfied. Six months after the date on which the requirements were satisfied. Since a qualified plan must be primarily for the benefit of employees and be nondiscriminatory, the plan has to cover a reasonable percentage of the company employees. A plan will be qualified only if it satisfies one of the following tests: The plan benefits a percentage of non-highly compensated employees equal to at least 70% of the percentage of highly compensated employees benefiting under the plan (the ratio percentage test). The plan meets the average benefits test. DIF: 1 REF: p. 19-8 | p. 19-9 NAT: AICPA FN-Measurement | AACSB Analytic PTS: 1 OBJ: 2 MSC: 10 min 3. Explain to a small business owner some advantages and disadvantages of a simplified employee pension plan (SEP). ANS: Defined benefit and defined contribution plans have become complex and costly, due to restive legislation over the past 15 years. Thus, a SEP has become an alternative to these traditional plans. Some advantages of the SEP are as follows: Less costly and complex. Can establish after the end of the tax year. Vesting immediately. There are still some disadvantages of a SEP: There is a 25% deduction limit for a SEP rather than a 100% deduction for certain defined contribution plans. Participation rules are stricter. There are no 10-year forward averaging techniques for certain lump-sum distributions. Someone else other than a covered participant must be the trustee. DIF: 1 REF: p. 19-24 | Concept Summary 19.2 NAT: AICPA FN-Measurement | AACSB Analytic PTS: 1 OBJ: 6 MSC: 10 min 19-34 2010 Annual Edition/Test Bank 4. Under what circumstances is it advantageous for an employee to elect to be taxed immediately as ordinary income on the FMV in excess of the amount paid for restricted property? ANS: The special election may be advantageous if: The bargain element is relatively small. Substantial appreciation is expected in the future. A high probability exists that the restrictions will be met. OBJ: 8 MSC: 5 min PTS: 1 DIF: 1 REF: p. 19-35 NAT: AICPA FN-Measurement | AACSB Analytic 5. From an employee's point of view, discuss the difference between the tax treatment accorded to a nonqualified stock option (NQSO) that has an ascertainable fair market value and one that does not. ANS: If a nonqualified stock option (NQSO) has a readily ascertainable fair market value (i.e., a warrant traded on an established market), the value of the option must be included in the gross income of the employee at the date of grant. No income is reported when the employee exercises the warrant. Capital gain or loss treatment occurs when the employee disposes of the optioned stock. The employee's basis at the date of disposition is the amount paid for the stock plus any amount reported as ordinary income. Where a NQSO does not have a readily ascertainable fair market value, the employee does not recognize income on the grant date. Instead, in the year of exercise, the employee reports as ordinary income the difference between the fair market value of the stock on the exercise date and the option price. The amount paid for the stock, plus the amount reported as ordinary income, becomes the employee's tax basis in the stock. Any appreciation above such basis is treated as a capital gain upon disposition. PTS: 1 OBJ: 9 MSC: 10 min DIF: 2 REF: p. 19-38 | p. 19-39 NAT: AICPA FN-Measurement | AACSB Analytic 6. Compare a 401(k) plan with an IRA. ANS: An instructor can use Concept Summary 19-4 to cover this comparison. Most employees will find a 401(k) plan more attractive than an IRA. Probably the biggest limitation of an IRA is the $5,000 maximum shelter in 2009 (ignoring the catch-up provision). Under 401(k), employees are permitted to shelter compensation up to $16,500 (in 2009). The restrictions on deducting contributions to IRAs for many middle-income and upper-income taxpayers may cause many employees to utilize 401(k) plans more frequently. Another difference between 401(k) plans and IRAs is the manner in which the money is treated. Money placed in an IRA may be tax deductible, whereas dollars placed in a 401(k) plan are considered to be deferred compensation. Thus, a 401(k) reduction may reduce profit sharing payments, group term life insurance, and Social Security benefits. PTS: 1 OBJ: 10 MSC: 10 min DIF: 2 REF: p. 19-40 | p. 19-41 | Concept Summary 19.4 NAT: AICPA FN-Measurement | AACSB Analytic ... View Full Document

End of Preview

Sign up now to access the rest of the document