TOOLS & TECHNIQUES OF EMPLOYEE BENEFIT AND RETIREMENT PLANNING
11th Edition
College Course Materials
Deanna L. Sharpe, Ph.D., CFP®, CRPC®, CRPS®
Associate Professor
CFP® Program Director
Personal Financial Planning Department
University of Missouri-Columbia
Please Note: Correct answers for each question are indicated in bold type. After each question,
the number of the page containing information relevant to answering the question is given. When a
calculation is necessary or the reasoning behind a given answer may be unclear, a brief rationale
for the correct answer is also given.
Part B: Employee Benefit Planning
Cash Compensation
Chapter 32: Bonus Plan
True/False
32.1
Bonuses are taxable to the employee as ordinary income.
32.2
Bonus plans are formal agreements that must be in writing and negotiated with an
attorney.
32.3
An incentive stock option plan is an alternative to a bonus plan
Answers:
32.1 true [p. 277]
32.2 false [p. 278]
32.3 true [p. 278]
Multiple Choice
32.4
In lieu of a bonus, an employer can provide a tax deferred benefit to employees by using
a.
b.
c.
d.
e.
a medical benefit plan
an incentive stock option plan
a nonqualified deferred compensation plan
all of the above
only b and c
Answer: D [p. 278]
32.5
If a bonus is based on “profits,” which of the following issues should the employer consider
a. if profits are determined before or after the bonus is paid
b.
c.
d.
e.
the legal definition of profit based in tax code
the impact of tax code changes on the agreement
a and b only
a, b, and c
Answer: E [p. 279]
32.6
Which of the following is (are) true?
a.
b.
c.
d.
e.
a bonus can become very large if based on company profit or earnings
a bonus does not give any opportunity to defer taxation
bonus arrangements are simple, flexible, and easy to design
a and c
a and b
Answer: D [p. 277-78]
Application
32.7
Buster Keaton, owner of Keaton Property Management, Inc. wants to establish a bonus
plan for his employees. Buster must:
a. understand that employees must treat bonuses as taxable income and thus the plan
may not be seen as a benefit
b. provide employees with a written plan
c. file the plan with the IRS prior to implementation
d. a and b
e. b and c
Answer: A [p. 278]
32.8
Jack Breem works for Metro Corp. Metro uses a calendar year accrual method of tracking
financial transactions. Jack earned a bonus in December of this year.
a. the corporation can deduct the bonus this year if payment is made within 2 1/2 months
after it is earned
b. Jack can move taxable income from the bonus into the next taxable year
c. Jack must pay taxes on the bonus this year
d. a and b
e. a and c
Answer: D [p. 278]
32.9
Fred Lawrey, owner of Play It Again Sports, a sporting goods resale shop, has given his
employees a verbal promise of a year end bonus if profits exceed 10%. Fred’s comment
constitutes a legally binding arrangement that an employee could use to force Fred to
comply with his promise.
a. true
b. false
Answer: B [pp. 278-79]
32.10 Baden Industries has three divisions: planning, manufacturing, and marketing. Tim
Jackson, owner of Baden, wants to tie a bonus plan to profit as an employee performance
incentive. As his financial advisor, you explain to Tim that profit can be calculated as
a.
b.
c.
d.
e.
the net gain shown on corporate financial statements
taxable income for federal income tax purposes
gains in one specific division to the exclusion of other divisions
all of the above
only a and b
Answer: D [p. 279]