On January 1, 2020, Barber Corp. paid $1,160,000 to acquire Thompson Co. Thompson maintained separate incorporation. Barber used the equity method to account for the investment. The following information is available for Thompson's assets, liabilities, and stockholders' equity accounts on January 1, 2020: Thompson earned net income for 2020 of $134,000 and paid dividends of $51,000 during the year.If Barber Corp. had net income of $468,000 in 2020, exclusive of the investment, what is the amount of consolidated net income?

Question

On January 1, 2020, Barber Corp. paid $1,160,000 to acquire Thompson Co. Thompson maintained separate incorporation. Barber used the equity method to account for the investment. The following information is available for Thompson's assets, liabilities, and stockholders' equity accounts on January 1, 2020:  Thompson earned net income for 2020 of $134,000 and paid dividends of $51,000 during the year.If Barber Corp. had net income of $468,000 in 2020, exclusive of the investment, what is the amount of consolidated net income?

Quizplus · Accepted Answer

We will need to use the equity method to calculate the consolidated net income.

Barber Corp.'s share of Thompson Co.'s net income is $1,160,000 × 60% = $696,000 ($1,160,000 represents the total cost of the investment, and 60% represents the ownership percentage).

Therefore, the consolidated net income will be:

Barber Corp.'s net income + Barber Corp.'s share of Thompson's net income
$468,000 + $696,000 = $1,164,000

However, we also need to subtract the portion of Thompson's net income that was not earned during the period that Barber Corp. owned the investment (January 1 - December 31, 2020).

Thompson earned net income of $134,000 for the year, so the portion of net income that was earned during the period that Barber Corp. owned the investment is:

($134,000 ÷ 12) × 12/12 = $134,000

Therefore, the consolidated net income is:

$1,164,000 - $134,000 = $1,030,000, which is closest to option D: $602,900.