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 2021 before the bonus and income tax was $140,000. 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 12% of the division's income before tax, but after the bonus itself. Calculate the amount of the bonus.

Answer 1

Answer :-

Required 2 -

The amount of bonus are as follows :-

It was given in the question that division manager receives a bonus of 12% of the division’s net income.And net income is given before tax and bonus. It means that we have to calculate the bonus on net income after bonus and taxes.

Net Income before bonus and Income tax = $140,000

Let bonus be B

Threfore, Net income after bonus = $140,000 - B

Tax rate = 30%

Total Tax = Net income after bonus × Tax rate

Total tax =( $140,000 - B) × 30% =$42,000 - 0.30B

Bonus rate = 12%

Bonus = Bonus rate × (Net income after Bonus - Total tax)

B = 12% × {$140,000 - B - ($42,000 - 0.30B)}

B = 12% × ($140,000 - B - $42,000 + 0.30B)

B = 12% × ($98,000 - 0.70B)

B = $11,760 - 0.084B

B +0.084B = $11,760

1.084B = $11,760

B = $11,760 /1.084

B = 10,849

The amount of bonus is $10,849

Required 3 -

Adjusting entries to record the bonus compensation are as follows :-

Date	Particular	Debit	Credit
	Bonus compensation expense A/c Dr.	$10,849
	To Bonus compensation payable A/c		$10,849

Required 4 :-

In the question given that the bonus is 12% of the division’s income before tax, but after the bonus

Net income after Bonus = $140,000 - B

Bonus = Bonus Rate × Net income after bonus

B = 12% × ($140,000 - B)

B = $16,800 - 0.12B

B + 0.12B = $16,800

1.12B = $16,800

B = $16,800 /1.12

B = $15,000

The amount of bonus is $15,000