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1May 2010 under the scheme employees receive a cumulative bonus on the completion of five years. The bonus is 2% of the total of the annual salary of the employees. Total salary of employees for the year to 30 April was 40m and a discount rate of 8% is assumed .Additionally at 30 April, it is assumed that all employees will receive the bonus and that salaries will rise by 5% per year
Assist with the workings especially he bonus cumulative and the $884 struggling with that
Thank you in advance
Hi,
We need to provide for the bonus each year and not just wait until the end of the fifth year to provide for it in full. As it is material it also needs to be recorded at present value, hence the discounting.
If the bonus is 2% of the salary then it will be 2% x $40m in the first year, which is where the $0.8 million comes from in the first year.
This then grows at 5% each year, hence why it is $0.84 million in the second year. The line below is the cumulative total each year, so at the end of year 2 it is $0.8 million + $0.84 million.
Once we worked out the cumulative total at the end of the five years of $4.42 million then we need to provide a fifth of this each year, hence the $884,000.
This $884,00 is the final value at the end of five years. As we’re at the end of the first year we need to discount it back by four years at 8% to get the present value of $0.65 million.
Hope this helps
Thanks
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