Liability for Bonuses

PROVISIONS AND CONTENGIENCES:

Exercises
SADOY, REY MARK, C.
 PROBLEM 3:
GARFIELD COMPANY
Garfield Company pays its general manager an annual bonus. For the year 2020, the company reported profit of P
8,000,000 before deductions for bonus and corporate income taxes.

The corporate income tax is 30%

REQUIRED: Determine the amount of bonus under each of the following assumptions:
a.) Bonus is 8% of profit before deductions for both bonus and income taxes.
b.) Bonus is 8% of profit after deduction for bonus but before deduction for income taxes.
c.) Bonus is 8% of profit before deduction for bonus but after deduction for income taxes.
d.) Bonus is 8% of profit after deduction for both bonus and income taxes.
COMPUTATION:

a.) Bonus is 8% of profit before deductions for both

bonus and income taxes
Net Income 8,000,000
Bonus = 8% (Profit before bonus and income tax) Less: Bonus -640,000
B = Bonus rate x (Net income)
Net Income after Bonus 7,360,000
B = .08 x 8,000,000
= 640,000 Less: Tax Expense -2,208,000
Net Income after tax 5,152,000
Income tax = 30% (Profit after bonus)
T = Tax rate x (Net Income – Bonus)
Journal entry:
T = .30 x (8,000,000 – 640,000)
Debit Credit
= .30 x 7,360,000
Bonus Expense 640,000
= 2,208,000
Liability for Bonuses 640,000
COMPUTATION:
b.) Bonus is 8% of profit after deduction for bonus but
before deduction for income taxes
Net Income 8,000,000
Bonus = 8% (profit after bonus)
B = Bonus rate x (Net Income – Bonus) Less: Bonus -592,593
B = .08 x (8,000,000 – B) Net Income after Bonus 7,407,407
= 640,000 - .08B Less: Tax Expense -2,222,222
B + .08B = 640,000 Net Income after tax 5,185,185
= 640,000 / 1.08
= 592,592.59 or 592,593 Journal entry:
Debit Credit
Income tax = 30% Bonus Expense 592,593
T = Tax rate x (Net Income – Bonus) To check: Liability for Bonuses 592,593
=.30 x (8,000,000 – 592,593)
= .30 x (7,407,407) B = .08% (N.I –B)
= 2,222,222 =.08% (8M – 592,593)
=.08% (7,407,407)
= 592,593
COMPUTATION:

c.) Bonus is 8% of profit before deductions for bonus

but after deduction for income tax Net Income 8,000,000
Less: Bonus -459,016
Bonus = 8% (Profit before bonus but after income Net Income after Bonus 7,540,984
tax) Less: Tax Expense -2,262,295
B = .08% (N.I – 30% (N.I – T)) Net Income after tax 5,278,669
= .08% (8,000,000 – 30%(8M – B))
= .08% (8,000,000 – 2,400,000 + .08B) Journal entry:
= .08% (5,600,000 + .30B) Debit Credit
= 448,000 + 0.024B Bonus Expense 459,016
B -.024B = 448,000 Liability for Bonuses 459,016
0.976B = 448,000
B = 448,000 / .976
= 459,016.39 or 459,016 To check:
B = .08% (N.I – T)
Income tax = .08% (8,000,000 – 2,262, 295)
T = Tax rate x (Net Income – Bonus) = .08% (5,737,705)
T = .30 x (8,000,000 – 459,016.39) = 459,016
= .30 x 7,540,983.61
= 2,262,295.08 or 2,262,295
COMPUTATION:

d.) Bonus is 8% of profit after deduction for both bonus

and income taxes.
Net Income 8,000,000
Bonus = 8% (Profit after bonus and income tax)
Less: Bonus -424,424
B = .08% (N.I – B – T)
Net Income after Bonus 7,575,576
= .08% (N.I – B – 30%( N.I – B)
Less: Tax Expense -606,046
= .08% (8,000,000 – B – 30% (8,000,000 – B))
Net Income after tax 6,969,530
= .08% (8,000,000 – B - 2,400,000 + . 30B)
= .08% (5,600,000 – B - .70B)
Journal entry:
= 448,000 - .056B
Debit Credit
B +.056B = 448,000 Bonus Expense 424,424
1.056B = 448,000 Liability for Bonuses 424,424
B = 448,000 / 1.056
= 424,424

Income tax
T = Tax rate x (Net Income – Bonus)
T = .08% (8,000,000 – 424,424)
T = .08% (7,575,576)
= 606,046.08