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1. For the following problem, assume the company pays its managers a bonus according to the
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Liabilities Exercises

In a Word document, complete the following assignments:

1. For the following problem, assume the company pays its managers a bonus according to the following terms:

 

Employer's Reported Net Income Bonus Amount

Less than $1,000,000 $0

 

More than $1,000,000 but less than $2,000,000 10% of excess of net income > $1,000,000

 

More than $2,000,000 $100,000

 

 

Assume that managers expect earnings in the current year to be $1,990,000 and earnings next year to be $1,500,000. Explain what incentives there are, if any, for managers to:

  1. Increase reported earnings in the current year and decrease reported earnings next year
  2. Decrease reported earnings in the current year and increase reported earnings next year

2. Journalize the following entries on the books of Winston Co. for November 1, December 1, December 31, and March 1. (Assume a 360-day year is used for interest calculations.)

  • Nov. 1 Winston Co. purchased merchandise for $60,000 on account from Bagley Co., terms n/30
  • Dec. 1 Winston Co. issued a 90-day, 5% note for $60,000 on account
  • Dec. 31 Accrued interest on the note
  • Mar. 1 Winston Co. paid the amount due
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