Bonus calculation question

  • Creator
    Topic
  • #191660
    Anonymous
    Inactive

    Able Co. provides an incentive compensation plan under which its president receives a bonus equal to 10% of the corporation’s income before income tax but after deduction of the bonus. If the tax rate is 40% and net income after bonus and income tax was $360,000, what was the amount of the bonus?

    A.

    $36,000

    B.

    $60,000

    C.

    $66,000

    D.

    $90,000

    To solve this problem, work backwards. If net income after the bonus and the taxes was $360,000, then (taking the tax expense back first) income before taxes was $600,000 (using the after-tax back to pre-tax conversion formula, $360,000 ÷ 0.6 = $600,000, 0.6 = 1 less the tax rate of 40%). Now, the bonus is equal to 10% of the income after deducting the bonus, which would be the income before taxes of $600,000. Thus the bonus is 0.10 × $600,000, or $60,000.

    can someone break down the math,i got a different answer. i did B=10%(I-B), and 60%I-B=360,000 and ended up getting 64,000 something. did i calculate wrong or is my equation wrong

  • You must be logged in to reply to this topic.