Phelps Co.uses the sophisticated equity method to account for the 80% investment in its subsidiary Shore Corp.At the time of the acquisition, the fair values of the net asset required approximated their book values.Based upon the following information, what is consolidated net income
$\begin{array}{lr}
\text { Phelps internally generated income: } & \$ 250,000 \
\text { Shore internally generated income: } & \$ 50,000 \
\text { Intercompany profit on Shore beginning inventory: } & \$ 10,000 \
\text { Intercompany profit on Shore ending inventory: } & \$ 15,000
\end{array}$

A)$300,000
B)$295,000
C)$286,000
D)$305,000

Question

Phelps Co.uses the sophisticated equity method to account for the 80% investment in its subsidiary Shore Corp.At the time of the acquisition, the fair values of the net asset required approximated their book values.Based upon the following information, what is consolidated net income
$\begin{array}{lr}
\text { Phelps internally generated income: } & \$ 250,000 \
\text { Shore internally generated income: } & \$ 50,000 \
\text { Intercompany profit on Shore beginning inventory: } & \$ 10,000 \
\text { Intercompany profit on Shore ending inventory: } & \$ 15,000
\end{array}$

A)$300,000
B)$295,000
C)$286,000
D)$305,000

Quizplus · Accepted Answer

Consolidated net income is the sum of the parent's internally generated income and the equity in the subsidiary's net income. The equity in the subsidiary's net income is 80% of the subsidiary's internally generated income, plus 80% of the intercompany profit on the subsidiary's ending inventory, minus 80% of the intercompany profit on the subsidiary's beginning inventory. Therefore, consolidated net income is $250,000 + (80% x $50,000) + (80% x $15,000) - (80% x $10,000) = $295,000.

Phelps CoUses the Sophisticated Equity Method to Account for the 80