Sometimes compensation packages include bonuses designed to
provide performance incentives to employees. The difficulty a bonus
can cause accountants is not an accounting problem, but a math
problem. The complication is that the bonus formula sometimes
specifies that the calculation of the bonus is based in part on the
bonus itself. This occurs anytime the bonus is a percentage of
income because expenses are components of income, and the bonus is
an expense.
Regalia Fashions has an incentive compensation plan through which a
division manager receives a bonus equal to 8% of the division’s net
income. Division income in 2018 before the bonus and income tax was
$245,000. The tax rate is 30%.
Required:
2. Calculate the amount of the bonus.
3. Prepare the adjusting entry to record the bonus
compensation.
4. Bonus arrangements take many forms. Suppose the
bonus specifies that the bonus is 8% of the division’s income
before tax, but after the bonus itself. Calculate the amount of the
bonus.
2. Express the bonus formulaas one or more algebraicequation(s).
Let B = Bonus
Let T = Taxes
B = 8% x ($245000 – B – T)
T = 30% x ($245000 – B)
Using these formulas calculate the amount of the bonus.Substitute 30% x ($245000 – B) for T in the first formula
B = 8% x [245000 – B– 30% x ($245000 – B)]
B = 8% x (2450,00– B – 73500 + .3B)
B = 8% x (171500 – .7B)
B = 13720 – .07B
1.07B = 13720
B = 13720 ÷ 1.07
B = $12822
3. Bonus compensation expense $12822
Bonus compensation payable $12822
4. Let B = Bonus
B = 8% x (245000 – B)
B = 19600 – .08B
1.08B = 19600
B = 19600 ÷ 1.08
B = 18148
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