In January 2010, Rich Corporation estimated that its 2010 year-end bonus to executives would be $1,125,000 for 2010. This forecast was based on the actual amount paid for the bonuses in the previous year. The estimate for 2010 is subject to change as the year adjusts. What amount, if any, of expense should be reflected in Rich's quarterly income statement for the three months ended March 31, 2010?
To determine the amount of expense that should be reflected in Rich Corporation's quarterly income statement for the three months ended March 31, 2010, we need to understand the accounting principle of "matching."
The matching principle states that expenses should be recognized in the same period as the revenues they helped generate. In the case of the year-end bonus to executives, the expense should be allocated to the periods in which the employees have earned the bonus, usually based on their service or performance during that period.
Since the estimate for the year-end bonus is subject to change, it is important to update the expense accordingly as the year progresses.
For the three months ended March 31, 2010, only one quarter of the year has passed, and hence only a portion of the executives' service or performance had been completed. As a result, we need to prorate the estimated bonus expense for the first quarter.
To determine the expense for the first quarter, we can use the formula:
Estimated bonus expense for the year x (Number of months in the quarter / Total number of months in the year)
In this case:
Estimated bonus expense for the year = $1,125,000
Number of months in the quarter = 3 months
Total number of months in the year = 12 months
Plugging in these values into the formula:
$1,125,000 x (3/12) = $281,250
Therefore, the amount of expense that should be reflected in Rich Corporation's quarterly income statement for the three months ended March 31, 2010, is $281,250.