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 five 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 five years.
E)None of these.

Question

Quizplus · Accepted Answer

If the employer accepts Turner's counteroffer, Turner will receive a monthly salary of $40,000 ($480,000 annually) and a $180,000 bonus in five years when Turner will be age 65. Therefore, each month Turner will recognize $40,000 in income for the year and $180,000 in year 5. Therefore, option C is correct. Option A is incorrect because it does not take into account the bonus payment received in year 5. Option B is incorrect because it treats the bonus payment as if it were received monthly rather than in year 5. Option D is incorrect because there is no interest element in the compensation agreement.

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