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 $180,000.S reports net income of $900,000 for 2014 and pays dividends of $300,000.P's Equity from Subsidiary Income for 2014 is:
A)$720,000.
B)$576,000.
C)$604,800.
D)$864,000

Question

Quizplus · Accepted Answer

To calculate P's Equity from Subsidiary Income for 2014, we need to take into account the following factors:

1. P Corporation owns an 80% interest in S Corporation.
2. S Corporation sold equipment to P Corporation and gained $180,000.
3. S Corporation reported net income of $900,000 and paid dividends of $300,000.

First, we need to calculate S Corporation's net income attributable to the non-controlling interest (NCI):

NCI's share of S Corporation's net income = 20% x $900,000 = $180,000

Next, we need to calculate P Corporation's share of S Corporation's net income:

P's share of S Corporation's net income = 80% x $900,000 = $720,000

Since P Corporation owns an 80% interest in S Corporation, it is entitled to receive 80% of the gain on the sale of equipment from S Corporation to P Corporation:

P's share of S Corporation's gain on equipment sale = 80% x $180,000 = $144,000

Finally, we can calculate P's Equity from Subsidiary Income for 2014:

P's Equity from Subsidiary Income = P's share of S Corporation's net income - NCI's share of S Corporation's net income + P's share of S Corporation's gain on equipment sale - Dividends received from S Corporation

P's Equity from Subsidiary Income = $720,000 - $180,000 + $144,000 - $300,000

P's Equity from Subsidiary Income = $604,800

P Corporation Acquired an 80% Interest in S Corporation Two