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Last year, X Corporation had sales of $500,000 and total expenses of $300,000. A manager of the company is entitled to get a sales commission of 10% of net profit.
What amount of sales commission is to be recognized at year-end?
The correct answer is A. $20,000. First, calculate net profit before the commission:
Net profit = Sales - Total expenses = $500,000 - $300,000 = $200,000
The manager's commission is 10% of net profit, so:
Commission = 10% $200,000 = $20,000
Therefore, the amount to recognize at year-end is $20,000. Under accrual accounting, expenses are recognized in the period in which they are incurred, even if they have not yet been paid. Since the company earned the profit during the year and the manager became entitled to the commission based on that profit, the commission expense should be recorded at year-end in the same reporting period. This follows the matching concept, which aligns expenses with the revenues they helped generate.
Option B is incorrect because it represents 10% of sales, not net profit. Option C and Option D do not match the 10% commission calculation based on the stated profit amount. Since the problem clearly says the commission is based on net profit, the correct recognized amount is $20,000, making Option A correct. Accounting texts describe net profit as revenues minus expenses.