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TCP CPA Practice Questions: RSUs (Restricted Stock Units)
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May 10, 2024
In this video, we walk through 5 TCP CPA exam practice questions teaching about restricted stock units (RSUs) as equity compensation. Important Links Link to the free study training webinar mentioned in the video: https://www.superfastcpa.com/strategic-study See the full post for this video: https://www.superfastcpa.com/tcp-cpa-practice-questions-explained-restricted-stock-units-rsus/ See the other TCP walkthrough videos here: https://www.superfastcpa.com/free-tcp-cpa-practice-question-walkthroughs/ 00:00 Intro 00:45 Question 1: RSU Taxability on Vesting Date 02:26 Question 2: Ordinary Income Calculation on Vesting Date 04:19 Question 3: Calculating the Gain on Sale of Restricted Stock Units 05:51 Question 4: Calculating Gain Per Share 06:45 Question 5: Calculating Income at Vesting Date and Gain on Sale 08:04 Pillar Topics
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Welcome to our first TCP walkthrough video. I'm Logan, and in today's video, we're going to be going over restricted stock units or RSUs
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And we're going to be doing that, the Superfast CPA way, which is diving straight into questions to learn the material
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If you don't know much about our strategies, make sure you go to our free training webinar on superfastcpa.com
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We teach the key ingredients to passing the CPA exam. And again, it's only one hour, it's free, and it will save you so much time struggling with your process
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One more thing I want to mention about this video. I will only be going over five questions in this video, but we will start posting our full
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10 question videos on our members forum. So Superfast CPA members will start having access to the full 10 question video to get more practice
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With that said, let's dive straight into the questions. All right, here's question one
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John, an employee at Solar Tech Corporation, was granted 1,000 restricted stock units or
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RSUs as part of his compensation package in year one. The RSUs are set to vest at the start of year four, provided John is still employed by Solar Tech Corporation at that time
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On the vesting date, the fair market value of Solar Tech's stock is $50 per share, assuming no other compensation-related adjustments or deductions
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What is the ordinary income John will recognize on the vesting date of the RSUs
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Okay, if you don't really know how restricted stock units work, that's okay
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That's why we're here in this video. So because this is the first question and we don't know how it works
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Let's go ahead and go straight into the answer to start learning how it works. All right, and the answer is $50,000
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This is calculated by multiplying the number of RSUs that vest, so 1,000 units
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by the fair market value of the stock on the vesting date, $50 per share
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Since RSUs are taxed as ordinary income at the market value on the vesting date
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John would recognize $50,000 in ordinary income. RSUs are a type of equity compensation award
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Equity compensation refers to the practice of granting company shares or operations, to purchase shares as part of an employee's compensation
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Restricted stock units are a promise to give an employee a set number of shares or the cash equivalent
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on a future date subject to certain conditions, usually including a vesting schedule
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So basically, these stock units are compensation given to employees with certain rules and restrictions
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So in other words, once these vest, the employee is taxed at the fair market value of those shares on that date
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on that date All right now that we learned a little bit about that let go ahead and go to the next question Here question two Alex is granted 500 shares of restricted stock by her employer EcoEnergy Corp on January 1st of year 1
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The shares are subject to a vesting schedule requiring Alex to remain with the company for three years
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On January 1st of Year 3, these shares are no longer subject to forfeiture and become transferable
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The fair market value of Ecoenergy stock on this date is $40 per share
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Assuming Alex does not sell the shares immediately and no other compensation related
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are necessary, what amount of ordinary income must Alex recognize on January 1st of year before
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Okay, this is very similar to the first question, and that's on purpose
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So go ahead, pause the video, see if you can figure out the correct answer, and when you're ready, come back and we will look at the answer together
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Okay, here's the answer. It is $20,000. Again, very similar. This is calculated by multiplying the number of shares that have vested, the 500 shares
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By the fair market value of the stock on the date, it becomes transferable, and is no longer subject to
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forfeiture. Basically, by the way, that's pretty much what the vesting date is. You know, there can be
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different vesting conditions and things like that, but generally this means that it's no longer
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subject to forfeiture and it's also transferable. So they kind of have control of the stock at that
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point. Since restricted stocks are in taxed at ordinary income at the market level on the
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vesting date when they are either transferable or no longer subject to forfeiture, Alex would
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recognize $20,000 in ordinary. And by the way, technically it's a the earlier of those two dates, you know, the earlier of when it's transferable or no longer
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subject to forfeiture. However, typically they're very close together and there can be problems
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if they're too far apart. So you won't really need to focus on that too much. So just remember
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that when it's no longer subject to forfeiture, it's transferable. That's usually most likely the
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besting date. All right, let's go ahead and go to the next question. All right, here's question
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3. Mia was granted 200 restricted stock units or RSUs by her employer Bright Tech innovations
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on January 1st of year 1. These RSUs vested on January 1st of year 2 when the fair market
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value of Bright Tech stock was $30 per share. Mia decides to hold on to the shares and she
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sells them on January 1st of year 3 for $50 per share. Assuming no other compensation related
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adjustments are necessary, how much capital gain must Mia recognize from the sale of her
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RSUs and what type of gain is it? Okay, so this is not asking us
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what the taxable income is on the vesting date it asking us what the gain would be when you sell that stock later So you could probably figure this out Go ahead pause the video take what you learned from the previous two questions
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and you'll probably be able to figure out this one as well. And when you're ready, come back and we will look at the answer
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All right, the answer is that it would be a $4,000 short-term capital gain. This is calculated by subtracting the total base of the shares
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which was the $200 times the $30 per share, from the total sales price of $10,000
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and that would be the gain of $4,000 representing the difference in value from the time of vesting
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and from the time of sale. Since the shares were held for one year from the date they vested, January 1st of year 2 to January 1st of year 3
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the gain is classified as short term. If the sale had taken place on January 2nd, it would have been a long-term gain
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Because remember, short-term is one year or less, and long-term is anything over a year
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So even if it's exactly at the year mark, that short-term. go ahead and go to the next question. All right, here is question four. Linda was granted 150
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restricted stock units or RSUs by her employer, Green Future Corp, on March 3rd of year one
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These RSUs vested on April 15th of year two when the fair market value of Green Future stock was
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$40 per share. Linda holds the shares and later sells them on June 25th of year 3 for $55 per share
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What is the game per share that Linda realizes on the sale of her RSUs? All right, so this is similar
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to the last question, but now you have to figure out. how much the gain is per share. So again, pause the video. I think you could figure this out
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and when you're ready to come back and we will look at the answer. All right, $15 per share
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So pretty simple. You calculate that by subtracting the cost basis per share, which was the
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fair market value at vesting from the selling price per share. And that's the difference of $15 per share
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And that's how much her gain would be per share. So really not too complicated. Let's go ahead and
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go to the next question. All right, here's question five. Kevin was granted 100 restricted stock units
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by his employer, Aquatech Industries on July 2nd of year 1, the RSU's vest on August 5th of
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year 3 when the fair market value of Aquitech stock is $70 per share, Kevin decides to sell
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the shares on November 10th of year 4, when the stock price is $90 per share. Assuming no other
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compensation-related adjustments are necessary, what is the total amount of ordinary income
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Kevin must recognize at vesting, and what type of gain does Kevin realize when he sells the
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shares? Okay, so this question is kind of taking everything we've learned so far, and you need
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to apply what you know about the vesting date and then what you know about when the stocks are sold And when you ready come back and we will look at the answer together All right and the answer is that it would be of ordinary income
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and then a $2,000 long-term capital gain. So again, at the vesting date, you take the fair market value of those per share
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and that is taxed as ordinary income, and then later on, you take that fair market value as the basis
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and when you sell the stock, the difference between that basis and the selling price of the stock is a gain or a loss
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So not too complicated. We learned a lot about RSUs in this video. Before we go any further
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let's go ahead and do one more part of the Super Fast CPA strategy, which is something called Pillar Topics
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Now, if you don't know much about our strategies, again, pillar topics is the idea that as you're going through the questions
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to learn the material, you will notice the things that keep popping up
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the things that are obviously important, and the concepts that you need to know, because you've seen them in like three or four questions
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So you write those down so that you can remember them for later. So again, let's go ahead and look at the pillar topics for this video
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All right, here are the pillar topics. Restricted stock units or RSUs are a type of equity compensation
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They are a promise to an employee to give a set number of shares on a future date. RSUs are usually taxed as ordinary income on the vesting date
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The vesting date can vary, but typically is the date. The stock is not subject to forfeiture and is transferable
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It's between the earlier of those two dates. Again, you probably won't have to worry too much about that
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but just wanted to let you know that's technically, typically the case
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The amount that is considered ordinary income on the vesting date is the basis that is used on the date of sale to determine the gain on the sale
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So it all kind of works together. On the vesting date, whatever the fair market value is on that day
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that's the basis of the stock at that point, and also that's how much will be taxed as ordinary income
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And then if you sell the stock later on, the gain or loss is determined using that
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basis and the selling price. All right, that is it for this video. Again, we're only doing
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five questions in this video, and Superfast CPA members will have access to the full video that
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has 10 questions. Be sure to check out our free one hour training webinar on superfastcpa.com. Again
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it's one hour, it's free, and it will save you so much time struggling with your CPA process
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If you like to go in through questions as your main learning material, make sure you check out our Superfast CPA app where we have five question mini quizzes that you can easily access all
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throughout your day. And if you like this video, make sure to like it and leave a comment. I hope this
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was helpful, and I will see you in the next video
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