Sometimes compensation packages include bonuses designed to provide performance

Question

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 12% of the division's net income Division income in 2016 before the bonus and income tax was $205,000. The tax rate is 30%. Required: 2. Calculate the amount of the bonus. (Do not round intermediate calculations.) mount of the bonus 3. Prepare the adjusting entry to record the bonus compensation. (Do not round intermediate calculations. If no entry is required for a transaction/event, select "No journal entry required" in the first account field.) View transaction list View journal entry worksheet No Event General Journal Debit Credit Bonus compensation expense Accrued bonus compensation payable

Explanation / Answer

PART-2) Solution: $15,885.61

Working:

B = 12% x [205,000 – B – 30% x ($205,000 – B)]

B = 12% x [205,000 – B – 61,500 + 0.3B)]

B = 12% x [143,500 – 0.7B]

B = 17,220 - 0.084B

1.084B = 17,220

B = 15,885.61

PART-3) Dr. Bonus compensation expense $15,885.61

Cr. Bonus compensation payable $15,885.61

PART-4) Solution: $21,964.29

Working:

B = 12% x (205,000 – B)

B = 24,600 - 0.12B

B= 21,964.29

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