The management of Hammer Enterprises shares in a bonus that is determined and paid at the end of each year. The amount of the bonus is based on 12% of income from continuing operations after tax. The bonus is not used in the calculation of income from continuing operations. During 2017, Hammer was sued and was ordered to pay $480,000 over and above the amount covered by insurance. The loss is tax deductible and the company's tax rate is 35%. The company was last involved in a lawsuit five years ago. Income from continuing operations before tax for 2017, excluding the lawsuit loss, was $750,000.
What would management's 2017 bonus be if the lawsuit is considered unusual but not infrequent?

Question

Quizplus · Accepted Answer

To calculate the bonus, we need to first calculate income from continuing operations after tax, which is:
($750,000 - $480,000) x (1 - 0.35) = $223,500
Then, we can calculate the bonus as:
$223,500 x 0.12 = $26,820
However, since the bonus is not used in the calculation of income from continuing operations, we need to subtract the bonus from income before tax:
$750,000 - $26,820 = $723,180
Therefore, the bonus for management for 2017 would be $21,060 (Option C).

The Management of Hammer Enterprises Shares in a Bonus That