I am pretty sure I am having a tough time understanding the question. From what I read the company pays the CEO a bonus based on the income after taxes .. if the income according to the question is 1.2 mil and tax rate is 30% then income after taxes is 840k and the 15% bonus should be 126k but thats not the right answer. Below are both the question and the answer
The CEO's compensation contract includes a provision for a bonus of 15% of income before the bonus but after income taxes (30% rate). Income before bonus and income tax is $1.2 million for the current year. The bonus is computed and paid at year-end to obtain the tax deduction for the bonus in the current year. Prepare the journal entry to record the bonus only.
Let B = bonus and T = income tax
B = .15(1.2 million - T)
T = .30(1.2 million - B)
B = .15(1.2 million - [.30(1.2 million - B)])
B = .15(1.2 million - [.30(1.2 million) - .30B])
B = .15(1.2 million - .36 million + .30B)
B = .15(.84 million + .30B)
B = .126 million + .045B
.955B = .126 million
B = .126 million/.955 = 131,937
Since the bonus is paid before year end, the entry would be:
Salary expense 131,937
Cash 131,937