LIABILITY FOR BONUSES

Classification of Employee Benefits

• Short-term employee benefits= employee benefits (other than termination

benefits) that are expected to be settled wholly before twelve months after the
end of the annual reporting period in which the employees render the related
service.
• Post-employment benefits= employee benefits (other than termination benefits
and short-term employee benefits) that are payable after the completion of
employment.
• Other long-term benefits= all employee benefits other than short-term
employee benefits, post-employment benefits and termination benefits.
• Termination benefits= employee benefits provided in exchange for the
termination of an employee’s employment as a result of either:
o (a) an entity’s decision to terminate an employee’s employment before the
normal retirement date; or
o (b) an employee’s decision to accept an offer of benefits in exchange for
the termination of employment.

1
Short-term Employee Benefits
Short-term employee benefits include all the following items (if payable within 12
months after the end of the reporting period):

• wages, salaries and social security contributions

• paid annual leave and paid sick leave
• profit-sharing and bonuses; and
• non-monetary benefits (such as medical care, housing, cars and free or
subsidized goods for current employees).

Bonuses are usually based upon the productivity of an individual. Today's companies are
relying less on salary and more on bonuses to attract and reward executives.

Bonuses can be computed in several different ways, each yielding a different amount. The
bonus percentage can be based on income:

1) Before deducting the bonus and income taxes,

2) After deducting the bonus, but before deducting income taxes,
3) Before deducting the bonus, but after deducting income taxes,
4) After deducting both bonus and income taxes.

Illustrations

Bonus (B)
Bonus rate is 20% (BR)
Income before deducting bonus and income tax, P88,235 ( I )
Income Tax rate is 30% (TR)
Income Tax (T)

1. Calculating Bonus BASED ON INCOME BEFORE DEDUCTING THE BONUS AND INCOME TAXES

a) Formula: B = BR x I

b) Solution: B= 20% x (88,235)

B = 17,647

2
2. Calculating Bonus BASED ON INCOME AFTER DEDUCTING BONUS, BUT BEFORE DEDUCTING INCOME
TAXES

a) Formula: B = BR x (I – B)

b) Solution: B = 20% x (88,235 – B)

B = 17,647 - .20B

B + .20B = 17,647

B = 17,647/1.20

B = 14,706

Checking: Income before bonus and income taxes 88,235

Bonus (14,706)

Income after bonus but before income taxes 73,529

Bonus Rate x 20%

Bonus 14,706

3) Calculating Bonus BASED ON INCOME BEFORE DEDUCTING THE BONUS BUT AFTER DEDUCTING
INCOME TAXES

a) Formulas: B = BR x ( I – T )

T = TR x ( I – B )

b) Solution: T = 30% x (88,235 – B)

T = 26,470.50 - .30B

B = 20% x [88,235 – (26,470.50 - .30B) ]

B = 20% x (61,764.50 + .06B)

B - .06B = 12,352.90

B = 12,352.90/.94

B = 13,141

3
Checking: Income before bonus and income taxes 88,235

Income Taxes 30% (88,235 – 13,141) (22,528)

Income after income taxes but before bonus 65,707

Bonus Rate x 20%

Bonus 13,141

4) Calculating Bonus BASED ON INCOME AFTER DEDUCTING BOTH BONUS AND INCOME TAXES

a) Formulas: B = BR x ( I – B – T )

T = TR x ( I – B )

b) Solution: T = 30% x (88,235 – B )

T = 26,470.50 - .30B

B = 20% x [ 88,235 – B – (26,470.50 - .30B)]

B = 20% x [ 61,764.50 – B + .30B]

B = 20% x [61,764.50 - .70B]

B = 12,352.90 – .14B

B + .14B = 12,352.90

B = 12,352.90/1.14

B = 10,836

Checking: Income before bonus and income taxes 88,235

Bonus (10,836)

Income after bonus but before income tax 77,399

Income taxes (77,399 x 30% ) (23,220)

Income after bonus and income taxes 54,179

Bonus Rate x 20%

Bonus 10,836

4
Bonus Accrual
A bonus expense should be accrued whenever there is an expectation that the financial or
operational performance of a company at least equals the performance levels required in any
active bonus plans. The decision to accrue a bonus calls for considerable judgment, for the
entire period of performance may encompass many future months, during which time a person
may not continue to achieve his bonus plan objectives, in which case any prior bonus accrual
should be reversed.

One thing you should not do is accrue a significant bonus expense in a situation where the
probability that the bonus will be awarded is low since it creates a false expense that is later
reversed when the performance period is complete.

A sample bonus accrual is:

Debit Credit

Bonus expense xxx

Accrued bonus liability xxx

The preceding example shows a simple accrual of the bonus expense.

When an accrued bonus is later paid, the resulting journal entry eliminates the accrued
bonus liability.

Debit Credit

Accrued bonus liability xxx

Cash xxx

Financial Statement Presentation

Bonus expense is part of salaries and compensation expense and reported as an operating
expense in the statement of profit or loss of the company.

Accrued bonus liability if unpaid at year end, is presented as current liability in the company’s
statement of financial position.

5
Exercises
Corona Company pays its chief executive a yearly bonus. For the year 2019, the company
reported profit before deductions for bonus and income taxes of P10,000,000. Income tax rate
is 35%.

Determine the amount of Bonus for the following independent cases:

1. Bonus is 13% of profit before deduction for both bonus and income taxes.
2. Bonus is 11% of profit after deduction for bonus but before deduction for income taxes.
3. Bonus is 9% of profit before deduction for bonus but after deduction for income taxes.
4. Bonus is 8% of profit after deduction for both bonus and income taxes.