Winters,Inc. ,pays its managers a bonus consisting of 7% of net income (income after deduction of both bonus and income taxes).The company's income tax rate is 20%.Income for the current year is $600,000. How much bonus would be paid for the current year (rounded to whole dollars)?

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Quizplus · Accepted Answer

The bonus is calculated on the net income, which is income after taxes and the bonus itself. Let's denote the bonus as B. The net income before taxes and bonus is $600,000. The income after the bonus but before taxes is $600,000 - B. The income tax on this amount is 20%, so the tax paid is 0.2 * ($600,000 - B). The net income after taxes and bonus is therefore $600,000 - B - 0.2($600,000 - B). Since the bonus is 7% of the net income, we have B = 0.07 * [$600,000 - B - 0.2($600,000 - B)]. Solving this equation for B gives the bonus amount. The correct calculation leads to a bonus of approximately $31,818.