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12 January, 17:27

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.

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  1. 12 January, 21:18
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    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
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