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 8% of the division's net income. Division income in 2013 before the bonus and income tax was $245,000. The tax rate is 30%.

Calculate the amount of the bonus.

Answer 1

Answer:

The amount of bonus=$12,992.42

Explanation:

Step 1: Express the formula as one of more algebraic equations

Let B=Bonus

Let T=Taxes

B=8%x($245,000–B–T) ...equation 1

T=30%x($245,000–B)...equation 2

Since we have the value of T in equation 2, we can substitute it in equation 1 above;

B=8%x{(245,000–B–30%x(245,000–B)}

B=0.08 x {245,000-B-73,500+0.3 B}

B=0.08 x {245,000-73,500-B+0.3 B}

B=0.08 x {171,500-0.7 B}

B=13,720-0.056 B

B+0.056 B=13,720

1.056 B=13,720

B=(13,720/1.056)=$12,992.42

The amount of bonus=$12,992.42

Step 2: Prepare the adjusting entry to record the bonus  compensation

Bonus compensation expense       12,992.42

Bonus compensation payable                                   12,992.42