Consolidated Return Scenario: Company P purchased an 80% interest in Company S on January 1, 20X3, for $800,000. On the purchase date, Company S stockholders' equity was $800,000. Any excess of cost over book value was attributed to a patent with a 10-year remaining life. In 20X3, Company P reported internally generated net income before taxes of $150,000. Company S reported a net income before taxes of $70,000. The firms file a consolidated tax return at a 30% tax rate.
-Refer to the Separate Return scenario. The nondeductible portion of excess amortization is

Question

Quizplus · Accepted Answer

The excess of cost over book value is $800,000 - (80% of $800,000) = $160,000. This is attributed to a patent with a 10-year life, so annual amortization is $16,000. The nondeductible portion is 20% (minority interest) of $16,000, which is $3,200. However, the question asks for the nondeductible portion of excess amortization, which is 30% tax rate of $3,200, resulting in $960. But since the choices do not match this calculation, the closest option is $2,500, which might be due to a misinterpretation or error in the question setup.

Consolidated Return Scenario: Company P Purchased an 80% Interest in Company