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, 2017, 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 2017 and pays dividends of $300,000. P's Equity from Subsidiary Income for 2017 is:
A) $720,000.
B) $576,000.
C) $604,800.
D) $864,000

Question

Quizplus · Accepted Answer

P Corporation's Equity from Subsidiary Income for 2017 includes its share of S Corporation's net income adjusted for the gain on the sale of equipment. Since P owns 80% of S, it is entitled to 80% of S's net income, which is $900,000 * 80% = $720,000. However, the gain of $180,000 on the sale of equipment to P must be eliminated in consolidation because it is an unrealized intra-group profit. The gain is spread over the remaining life of the equipment (5 years), so the annual adjustment is $180,000 / 5 = $36,000. P's share of this adjustment is 80% * $36,000 = $28,800. Therefore, P's Equity from Subsidiary Income is $720,000 - $28,800 = $691,200. However, since this option is not available, it appears there was a mistake in my calculation. The correct approach is to adjust the net income for the unrealized gain before calculating P's share. The correct calculation is as follows: Adjust S's net income by subtracting the annual unrealized gain: $900,000 - $36,000 = $864,000. Then, calculate P's share of the adjusted net income: $864,000 * 80% = $691,200. It seems there was an error in my initial explanation, leading to confusion. The correct answer, based on the provided options and the need to adjust for the intra-group sale, should be recalculated considering the proper method for such adjustments.

P Corporation Acquired an 80% Interest in S Corporation Two