Question

Problem 13-5 Bonus compensation; algebra (LO13-3] 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 6% of the division's net income. Division income in 2018 before the bonus and income tax was $225,000. 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 6% of the division's income before tax, but after the bonus itself Calculate the amount of the bonus Complete this question by entering your answers in the tabs below. Required 2 Required Required Calculate the amount of the bonus (Oo net round Intermediate calculation reund vorswers to th e whole olaramount Amount of the bonus Required 3 >

Answer 1

Question 2 does not mention if the bonus is to be calculated on the income after tax or before tax, therefore we would do calculations for both the cases

a) Calculation of Bonus on Income before tax

= (Income) x % of Bonus

= 225,000 x 6%

$                                                                                                      13,500.00

a) Calculation of Bonus on Income after tax

= (Income - Tax) x % of Bonus

= [225,000 - (225,000*30%)] x 6%

$                                                                                                         9,450.00

Question 3 Adjustment Entry for Bonus Compensation

Bonus Expense account Dr.                    13,500

To Employee Bonus Payable account Cr.                13,500

Question 4, Calculation of Bonus on net income before tax but after the bonus itself

Bonus = (Income - Bonus) x % of Bonus

Assume B is the amount of Bonus

B =(225,000 - B) x 0.06

B =(225000)*0.06 - B*0.06

B = 13,500 - 0.06B

1.06B = 13,500

B = 13,500/1.06

B = 12,735.85