CEP Accounting and Taxation

Question 1

Issuing companies must provide what tax information annually?

Answer 1

Details regarding ISO exercises and initial transfer of ESPP shares.

Question 2

If an employee with ISOs dies:

Answer 2

the holding period for disqualifying dispositions will not apply.

Question 3

Pursuant to a domestic relations order as defined by the IRS, an employee transfers 1000 of her unvested ISOs to her ex-spouse. They both live in a community property states. After the grant vests, can her ex-spouse preserve the ISO preferential tax treatment if he exercises the options?

Answer 3

He cannot. Transfers of ISOs are not permissible under the Code and are disqualified from receiving preferential tax treatment.

Question 4

An employee dies six weeks after exercising ISOs. Three months afer her death, her survivors sell the shares that were issued upon exercise of the ISOs. The tax implication for the survivors is:

Answer 4

qualifying disposition of the ISO shares.

Question 5

An employee purchases 10,000 shares of company stock through the company’s restricted stock purchase plan at the FMV of $1 per share. He wants to avoid recognizing ordinary income tax liability when the stock vests. What action could he take to do this?

Answer 5

He can file a notice of 83(b) election with the IRS and the company no later than 30 days after the purchase date.

Question 6

Which of the following is true of Section 423 ESPP?

Answer 6

After an employee dies, an estate can be allowed to purchase shares using money he contributed to the plan before his death.

Question 7

A non-employee board member is granted an NSO for 10,000 shares at $10 per share. She early exercises this option when the market value is $12 per share. Properly filing a Section 83(b) election will have what effect on the company and the optionee?

Answer 7

The optionee will receive a From 1099-MIOSC from the company before January 31 of the next calendar year that details the gain on the exercise.

Question 8

Which kind of award is most likely to result in taxes and penalties for the recipient under IRC Section 409A

Answer 8

RSUs that allow recipients to choose when after vesting to receive payment.

Question 9

For publicly traded companies, shareholder approval of an employee stock option plan is required by law in which of the following instances?

Answer 9

A company institutes a Section 423 ESPP.

Question 10

When would an employee be most concerned about whether to sell stock obtained from the exercise of an ISO by the calendar year end?

Answer 10

There was a large spread at the time of exercise and the stock had fallen since then.

Question 11

Which of the following is required for a corporation to take a corporate tax deduction in connection with the exercise of an NSO?

Answer 11

It reports the taxable compensation on the employee’s Form W-2.

Question 12

The CEO owns 10.5% of a company’s common stock. The board of directors approves an ISO grant for the CEO of 15,000 shares when the market value of the company’s stock is $20. Which of the following requirements must the options meet to qualify as ISOs?

Answer 12

They must have an exercise price of no less than $22 and cannot have a life of more than five years.

Question 13

Which of the following describes awards that would most likely be reported separately in a company’s equity compensation-related disclosures?

Answer 13

NSO grants that vest based on time, and NSO grants that vest based on meeting earnings per share targets

Question 14

A company grants 100,000 NSOs to a contractor who is not eligible for employee benefits. The option grant will vest over four years, 25% each year. On the grant date, the contractor has a one-year contract with the company, which, if completed, allows her to continue vesting in options with no chance of forfeiture. The fair value of this grant will be:

Answer 14

variable until the contract is fulfilled and expensed over the same period.

Question 15

Over what period must a company that grants options in which vesting is contingent on increases in its stock price record the expense under ASC 718?

Answer 15

Between the grant date and expected vesting date, as determined by an option pricing model

Question 16

An employee’s vested stock options expire unexercised. How does the company handle the expense under ASC 718?

Answer 16

The company ceases to account for the award, but does not reverse previously stated amounts.

Question 17

A company that has outstanding stock options with time-based vesting raises the stock price volatility measure it uses in determining the Black-Scholes value of its option grants to employees. How does this affect the accounting expense it should recognize going forward?

Answer 17

It should not change the expense recognized for outstanding awards.

Question 18

A company chooses to accrue its expense under ASC718 using FIN28. Which of the following is true?

Answer 18

It will recognize the same expense as it would using straight-line recognition, but wil accrue the expense more quickly.

Question 19

An independent contractor is granted 1000 NSOs on 1/1/2008. The options will vest 25% per year over the next 4 years on the anniversary of the grant date as long as the contractor continues to do work for the company. On 2/2/2010, the contractor becomes an employee. The options continue to vest on schedule and under the same terms. How does the change in status affect how the company accounts for the option grant?

Answer 19

The vested portion is not affected, but the fair value of the unvested portion is expensed under ASC718 through the vesting date.

Question 20

A company grants employees performance-based stock options that will vest only if the company meets its sales targets. Under ASC718, the company must account for the options by:

Answer 20

calculating the the fair value at the grant date, then recording that amount over the options’ expected term.

Question 21

A company grants ISOs to a large group of full-time employees. The options vest in annual installments over the next four years. As the options vest, it becomes clear that the company has underestimated its turnover rate, and more of the options are exercised than initially expected. How does the company account for the tax expense associated with the option grant?

Answer 21

It does not estimate its tax deduction but instead records a tax benefit when disqualifying dispositions actually occur.

Question 23

Which of the following is a potential consequence for overwithholding restricted stock shares to cover taxes?

Answer 23

It can lead to additional accounting expense for the award.

Question 24

A company grants NSOs to a large group of full-time employes. The options vest in annual installments over the next four years. As they vest, it becomes clear that the company has understimated its turnover rate, and more of the options are exercised than initially expected. How does the company account for the tax expense associated with the grant?

Answer 24

It estimates the tax deduction to which it will be entitled and recognizes it as additional paid-in capital when it recognizes the ASC718 expense associated with the options.

Question 25

Which of the following would be included in the number of shares outstanding portion of a basic earnings per share calculation?

Answer 25

Vested restricted stock

Question 26

Which of the following is least likely to result in an additional expense under ASC718?

Answer 26

Acceleration of vesting

Question 27

An employee is let go in a company-wide reduction in force, but remains to provide contract services for the next six months. Under what circumstances can the company continue to account for his stock option awards under ASC718?

Answer 27

If he qualifies as a leased employee.