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For the following problem, assume the company pays its managers a bonus according to the following terms:
Liabilities Exercises
In a Word document, complete the following assignments:
1. For the following problem, assume the company pays its managers a bonus according to the following terms:
Employer's Reported Net Income Bonus Amount
Less than $1,000,000 $0
More than $1,000,000 but less than $2,000,000 10% of excess of net income > $1,000,000
More than $2,000,000 $100,000
Assume that managers expect earnings in the current year to be $1,990,000 and earnings next year to be $1,500,000. Explain what incentives there are, if any, for managers to:
- Increase reported earnings in the current year and decrease reported earnings next year
- Decrease reported earnings in the current year and increase reported earnings next year
2. Journalize the following entries on the books of Winston Co. for November 1, December 1, December 31, and March 1. (Assume a 360-day year is used for interest calculations.)
- Nov. 1 Winston Co. purchased merchandise for $60,000 on account from Bagley Co., terms n/30
- Dec. 1 Winston Co. issued a 90-day, 5% note for $60,000 on account
- Dec. 31 Accrued interest on the note
- Mar. 1 Winston Co. paid the amount due
