Question

In Year 4, the firm distributed $60,000 worth of coupons for use by customers when they buy certain products. The management of the firm estimates that 25% of the coupons will be redeemed. The coupons have no expiration date. The management of the firm authorizes merchants to add 20% to the value of coupons redeemed to offset management’s ‘pain and suffering’ when dealing with these coupons. During the year, payments of $11,500 have been made to merchants redeeming coupons. This was the first time Orion had distributed coupons to any customers.

REQUIRED: Expense in Year 4 from offering these coupons: $________ Estimated Liability at Dec. 31, Year 4, resulting from this coupon offering: $_______

In Year 4, the management of Orion made an offer of employment to a top-performing manager with its leading competitor. In addition to a base salary amount Orion’s management offered the individual the opportunity to earn a bonus based on the firm’s income above a base of $300,000. The bonus percentage is 3% of the firm income above a base level of $300,000 after tax and after bonus. The firm’s tax rate is 25%. The manager wants you to estimate the bonus assuming the firm’s actual total income for the next year will be $500,000.

Required: $___________ Estimated Bonus to the Manager

Answer 1

1) Expense in offering coupons:

Total coupon offered: $60000+20%=$60000+$12000=$72000

coupons redeemed : $11500 payment made

The firm has to create a liability for coupon value i.e., $60000 and

When payment is done, the payment is shown as expense and created liability will be decreased.

here, liability = $ 72000 & expense = $11500.

2)Bonus calculation: bonus paid @ 3%

Firm income after tax and bonus = $300000(72%)

(+)bonus @3%    = $12500(300000*3/72)

(+) Tax @25% = $ 104167(300000*25/72)

Income before tax and bonus = $ 416667

If firms actual total income = $500000(it is assumed as income before bonus and tax)

Then bonus @3% = $15000.