You are the CFO of Thunderduck Energy, Inc, a public company that specializes in

Question

You are the CFO of Thunderduck Energy, Inc, a public company that specializes in the exploration and development of natural gas. It's near year-end, and you have been in several meetings with management to discuss the end of year net income projections. The company’s employees receive a bonus if the company’s net income in the current year exceeds the net income from the past year. For the current year, the earnings have not been as strong as expected and net income may fall short of last year’s income.

The President has an idea to ensure that net income will increase this year so that the employees will earn their bonus and the shareholders will be happy. The President wants to discuss routine maintenance costs on equipment that were incurred this year. These costs were treated as an expense on the income statement. However, the President is proposing that these costs can be capitalized and should be accounted for as a long-term asset on the balance sheet in order to boost the company’s net income.

Required:

Draft a one-page response in the form of a business memo to the President discussing your recommendation on the his suggestion to capitalize the maintenance costs and record the costs as a long-term asset. Support your decision with addressing the accounting issue, the parties affected and what factors you considered to make your decision. Your memo will be graded based on the written communication, critical thinking and ethics rubrics.

Explanation / Answer

The task of fixing or setting of a compensation is very cruicial and it depends majorly on the objectives of the busoness. The HR department is the one in most of the organisations which fixes the compensation rates of employees. While setting up the compensation rates the following elements are considered:

a. Budget - Every position in an organisation is allocated a budget and the employee for the position can be offered the amount within the budget. It is always advisory to look for candidates who suit within the budget of the role and simaltaneously are good enough for the role. The budget of a compensation package defines the fixed and variable ratios that are to be offered to the candidate. The fixed ration consists of the fixed pay that the candidate is going to earn and the variable includes the benefits and incentives.

b. Comparison with Competition- Another very importnat factor especially in today's scenario is to keep an eye on what the competition is providing, accordingly either the salary is matched if the candidate is desirable by the organisation or if the candidate seems to be an extraordinary talent which suits the company's requirement, they are sometimes even ready to pay more than what the competition is paying. This helps in creating a competitive advantage.

c. Benefits packages- The most attractive thing in a compensation package is the benefits part. The employees are attracted towards taking up the job is majorly because of the benefits they would be provided. The benefits packages include health package, tuition reimbursements for children and other benefits.

Thus, the above three elements play a major role in the designing of a compensation package.

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