Research project Essay Example | Topics and Well Written Essays - 750 words - 1

Research project - Essay Example The projected net income before bonuses for the year is $17.2 million. The preliminary net income before bonuses for the first quarter is $3.7 million. According to (FASB 11) inaccurate recognition of bonuses result into inaccuracies within financial statements and hence it is important to make appropriate recording of bonuses as well as well as taxes associated with the same. Treatment of accounting transactions often requires careful consideration of the implications of the same both technically and at ethical levels. Reliable sources often emphasize the importance of accruing bonuses whenever it is expected that the company’s financial/operational performance will at least be equivalent to the set performance levels to warrant issuance of bonuses (Kimball 12). The accrual decision requires considerable judgment of the performance of the entire period which encompasses many future months during which one thing or another may impede achievement of the bonus plan objectives. A number of alternatives have been proposed for accrual of bonuses. These include: Non-accrual of expense until a reasonable probability of achieving the bonus is present Accrual of a smaller expense early in a given performance period to reflect high performance failure risk and accrue a larger expense in future when success probability is extremely high It is not advisable that one accrues significant bonus expense in an instance where probability of awarding the bonus is extremely low (Stickney 80). Such accruals provide a false expense which might be reversed later when the performance period comes to an end. A sample bonus accrual expense for the case presented could be as follows,    Debit Credit Bonus expense 185,000      Ã‚  Ã‚  Ã‚   Accrued bonus liability    185,000 Where payment for the accrued bonus is made later, the journal entry eliminates accrued bonus liability whilst recognizing any arising payroll tax liabilities which are associated with the accrued bonus. A entry for this could be as follows,    Debit Credit Accrued bonus liability 185,000   Ã‚  Ã‚  Ã‚   Cash    xxx Taxes    xxx As a matter of fact, when a percentage bonus is issued at the end of every quarter, it is important to recognize a portion of the bonus at the end of each month’s closing financial statements. For instance, the 5% bonus at each quarter’s end, an accrual of 5% of total salary expense is recorded at the end of every month’s cycle closure (FASB 54). A debit is posted to employee bonuses account for total accrual amount and credit is made to bonus accrual account. In the case discussed in the report, the bonus payment is pegged to the projected net income before bonuses of $17.2 million. However, going by the earnings for the current quarter, there is no high likelihood of attaining the projected income before payment of bonuses and hence its non-accrual is recommended until such time that the probability of attaining the projected i ncome before bonus is achieved. In general, the best way to treat the bonus expense is to handle it as an accrued expense or rather an expense incurred but not yet paid. This is consideration of the fact that whilst the bonus is anticipated, changes in the financial results of the company can prevent the company from incurring this expense at the end of the financial period. Incurrence of this expense is pegged on a condition which must be achieved for it to be affected.