Following your retirement as senior vice president of finance for a large company, you joined the board of Cayman Grand Cruises, Inc. You serve on the compensation committee and help set the bonuses paid to the company's top five executives. According to the annual bonus plan, each executive can earn a bonus of 1% of annual net income.
No bonuses were paid in 2016 because the company reported a net loss of $6,588,000.
Shortly after the end of the year, the compensation committee received a letter signed by all five executives, indicating that they felt the company had performed well in 2016. The letter identified the following items from the 2016 income statement that the executives felt painted a less favorable view of performance than was actually the case:
Proposed Adjustments to 2016 Earnings
($ in thousands)
Loss on early retirement of debt........................$131,474
Restructuring and other nonrecurring charges............63,000
Loss from discontinued operations........................22,851
The letter asked the compensation committee to add these items back to the reported net loss and to then recalculate the bonus awards for 2016. The fiscal year 2016 income statement follows. Assume the tax rate is 30%.
Cayman Grand Cruises, Inc.
Consolidated Statement of Income
($ in thousands) June 30, 2016
Net revenues..............................................................................$1,024,467
Cost of sales.................................................................................(535,178)
Gross margin.................................................................................489,289
Selling, general, and administrative.....................................................(299,101)
Research, development, and engineering................................................(94,172)
Gain on sale of joint venture.................................................................33,000
Loss on early retirement of debt.........................................................(131,474)
Restructuring and other nonrecurring charges..........................................(63,000)
Operating income (loss) ..................................................................(65,458)
Gain on sale of investment..................................................................40,800
Interest expense..............................................................................(7,145)
Interest income.................................................................................2,382
Other income (expense)-net...............................................................(2,121)
Income before income taxes...............................................................(31,542)
Income tax benefit..............................................................................9,462
Income from continuing operations.......................................................(22,080)
Income (loss) from discontinued operations (net of tax effect)......................(22,851)
Gain on disposal of discontinued operations (net of tax effect)........................38,343
Net income (loss) ..........................................................................$ (6,588)
Required:
1. As a member of the compensation committee, how would you respond to each suggested adjustment? Why?
2. What 2016 net income figure do you suggest be used to determine bonuses for the year?