Turner, a successful executive, is negotiating a compensation plan with his potential employer. The employer has offered to pay Turner a $600,000 annual salary, payable at the rate of $50,000 per month. Turner counteroffers to receive a monthly salary of $40,000 ($480,000 annually) and a $180,000 bonus in 5 years when Turner will be age 65.
A) If the employer accepts Turner's counteroffer, Turner will recognize $660,000 at the time the offer is accepted.
B) If the employer accepts Turner's counteroffer, Turner will recognize as gross income $55,000 per month [($480,000 + $180,000)/12].
C) If the employer accepts Turner's counteroffer, Turner will recognize $40,000 income each month for the year and $180,000 in year 5.
D) If the employer accepts Turner's counteroffer, Turner must recognize imputed interest income on the $180,000 to be received in 5 years.
E) None of the above.

Question

Quizplus · Accepted Answer

If the employer accepts Turner's counteroffer, he will receive a monthly salary of $40,000 ($480,000 annually) and a $180,000 bonus in 5 years. Turner will recognize $40,000 of income each month for the year, and $180,000 in year 5 as this is when the bonus is received. Therefore, option C is the correct answer. Option A is incorrect because $660,000 is the total amount Turner will receive over the year and does not account for the timing of the bonus. Option B is incorrect because the bonus is not included in the monthly gross income calculation. Option D is incorrect because there is no interest component to the compensation plan.

Turner, a Successful Executive, Is Negotiating a Compensation Plan with His