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

Reported Net Income Bonus Pool

Less than or equal to $10 million $0

Greater than $10 million,

but less than or equal to $20 million 10% of income excess of $10 million

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?

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