FINANCIAL

ACCOUNTING
Naveed Javed
I.D: 14P00034

TOPIC:
Profit-Sharing Bonus Payments
in the Income Statement

About Article:

Author: R. K. Mautz
Source: The Accounting Review, Vol. 22, No. 1
(Jan., 1947), pp. 54-57
Published by: American Accounting Association
URL: http://www.jstor.org/stable/239629

How to report different types of

bonus payments (having different
natures) in the income statement?

Types of bonuses :
Factory Workers' Bonus

Not depend
on annual
net income

General Employee Bonus

Depend on
General Staff Bonus
annual
net
Executive Bonus
income

Generally accepted treatment:

(1)to lump bonus payments with
regular wages and classify them
either in cost of goods sold or in
operating expenses, or
(2) to show them as a special item
in operating expenses.

Treatment in income statement:

Net sales
Cost of goods sold
Gross profit on sales
Operating expenses
Net income from operations
Federal income taxes
Net income for the year
Surplus at beginning of year
Total net income and surplus
Dividends on preferred stock
Dividends on common stock
Total dividends
Surplus at end of year

Problem in this treatment:

Factory workers bonus can be
considered to be a payment of
wages but
Other three bonuses are
distributions of income

Order of claim upon

current income :
(1) Preferred dividends;
(2) General employee and general staff
bonuses,
(3) A 6 % return on common stock
equity,
(4) Executive bonus, and
(5) Common stock dividends

Alternative treatment:
Net sales
Cost of goods sold
Gross profit on sales
Operating expenses
Net income from operations
Federal income taxes
Net income for the year
Dividends on preferred stock
Net income after preferred dividends
General Employee Bonus and General Staff Bonus
Remainder after general employee bonuses
Dividends on common stock
Remainder after common dividends
Executive Bonus
Remainder of net income to surplus
Surplus at beginning of year
Surplus at end of year

Problem in this
treatment:
Profit sharing Bonus payments are
deductible items for federal income tax
purposes and the bonus resolution
provides that these payments are to be
based upon an income figure before
Federal taxes
In this way Preferred dividends and 6%
return on common stock equity should
also be deducted before federal taxes

Most appropriate treatment:

Net sales
Cost of goods sold
Gross profit on sales
Operating expenses
Net income from the year's operations
Distributions as follows:
Federal income taxes
Dividends on preferred stock
Profit-sharing bonuses to employees
Common stock dividends
Total distributions of current income
Remainder of current income retained in the
business
Surplus at the beginning of the year
Surplus at the end of the year

Conclusion:
The proper way to report profitsharing bonus payments in the
income statement is among the
distributions of net income after
determination of the net income from
operations for the period.
Inclusion of such payments as an
operating expense represents either
a failure or a refusal to recognize
them as distributions of income.

Thank you