P Corporation purchased an 80% interest in S Corporation on January 1, 2016, at book value for $300,000. S's net income for 2016 was $90,000 and no dividends were declared. On May 1, 2016, P reduced its interest in S by selling a 20% interest, or one-fourth of its investment for $90,000. What will be the Consolidated Gain on Sale and Subsidiary Income Sold for 2016?
A) Consolidated Gain on Sale, $9,000; Subsidiary Income Sold, $6,000
B) Consolidated Gain on Sale, $9,000; Subsidiary Income Sold, $15,000
C) Consolidated Gain on Sale, $15,000; Subsidiary Income Sold, $6,000
D) Consolidated Gain on Sale, $15,000; Subsidiary Income Sold, $15,000

Question

Quizplus · Accepted Answer

The Consolidated Gain on Sale is calculated by subtracting the carrying amount of the sold interest from the selling price. P Corporation initially purchased an 80% interest for $300,000, meaning a 20% interest (one-fourth of the investment) has a carrying amount of $75,000 ($300,000 * 1/4). Selling this 20% interest for $90,000 results in a gain of $15,000 ($90,000 - $75,000). However, since P Corporation only owns 80% of S Corporation, the consolidated gain is 80% of $15,000, which is $12,000. This calculation error in the explanation indicates a mistake in identifying the correct answer based on the provided choices, as none of the choices directly match this calculation. The Subsidiary Income Sold should be calculated as the portion of S Corporation's net income attributable to the sold interest. Since the net income for 2016 was $90,000 and a 20% interest was sold, the income attributable to the sold interest is 20% of $90,000, which is $18,000. However, this explanation mistakenly calculates the consolidated gain and does not accurately reflect the choices provided, indicating a misunderstanding in the calculation process. The correct approach to find the Consolidated Gain on Sale involves recognizing that the sale price exactly matches the book value of the sold interest, leading to no actual gain on sale from a consolidated perspective, which contradicts the initial calculation provided. Additionally, the Subsidiary Income Sold should consider the income attributable to the sold interest up to the point of sale, adjusted for the parent's ownership percentage if considering consolidated figures, which was not accurately addressed in the initial explanation.

P Corporation Purchased an 80% Interest in S Corporation on January