Harris Corporation pays senior management an annual bonus from a bonus pool. The size of the bonus pool is determined as follows.

REQUIRED:

a. Assume that senior management expects current earnings to be $21 million and next year's earnings to be $18 million. What incentive does management of Harris Corporation have for managing earnings?

b. Assume that senior management expects current earnings to be $17 million and next year's earnings to be $24 million. What incentive does management of Harris Corporation have for managing earnings?

c. Assume that senior management expects current earnings to be $9.5 million and next year's earnings to be $12 million. What incentive does management of Harris Corporation have for managing earnings?

d. How might the bonus plan be structured to minimize the incentives for earnings management?

Transcribed Image Text:

Reported net income Bonus pool Less than or equal to $10 million. Greater than $10 million, but less than or equal to $20 million. Greater than $20 million. $0 10% of income in excess of $10 million $1 million