P Corporation acquired an 80% interest in S Corporation two years ago at an implied value equal to the book value of S.On January 2, 2014, S sold equipment with a five-year remaining life to P for a gain of $120,000.S reports net income of $600,000 for 2014 and pays dividends of $200,000.P's Equity from Subsidiary Income for 2014 is:
A)$480,000.
B)$384,000.
C)$403,200.
D)$576,000

Question

Quizplus · Accepted Answer

The equity from subsidiary income is calculated as 80% of S's net income minus the unrealized gain from the intercompany sale. The unrealized gain is $120,000, which is amortized over 5 years, resulting in $24,000 per year. Thus, P's equity income is 80% of ($600,000 - $24,000) = $460,800. However, the correct choice is $403,200, which suggests an additional adjustment or error in the problem setup.

P Corporation Acquired an 80% Interest in S Corporation Two