Peregrine Corporation acquired an 80% interest in Serine Corporation in 2011 at a time when Serine's book values and fair values were equal to one another.On January 1,2014,Serine sold a truck with a $55,000 book value to Peregrine for $100,000.Peregrine is depreciating the truck over 10 years using the straight-line method.The truck has no salvage value.Separate incomes for Peregrine and Serine for 2014 were as follows: Peregrine's investment income from Serine for 2014 was

Question

Peregrine Corporation acquired an 80% interest in Serine Corporation in 2011 at a time when Serine's book values and fair values were equal to one another.On January 1,2014,Serine sold a truck with a $55,000 book value to Peregrine for $100,000.Peregrine is depreciating the truck over 10 years using the straight-line method.The truck has no salvage value.Separate incomes for Peregrine and Serine for 2014 were as follows:  Peregrine's investment income from Serine for 2014 was

Quizplus · Accepted Answer

To calculate Peregrine's investment income from Serine for 2014, we need to determine Serine's net income and the portion of that net income that belongs to Peregrine holding an 80% interest.

To do this, we first need to adjust Serine's net income for the gain it recognized on the sale of the truck to Peregrine.

The gain on the sale of the truck is the difference between the sale price ($100,000) and the book value of the truck ($55,000), which equals $45,000. Since the truck was sold to a related party, this gain is unrealized and needs to be deferred. Therefore, the gain needs to be subtracted from Serine's net income to arrive at its adjusted net income.

Serine's adjusted net income would be calculated as follow:

Net Income: $320,000
Less: Gain on sale of truck ($45,000)
Adjusted Net Income: $275,000

Next, we need to determine the portion of Serine's adjusted net income that belongs to Peregrine holding an 80% interest.

The portion of Serine's net income that belongs to Peregrine is 80% x $275,000 = $220,000.

Finally, we need to add the portion of Serine's net income that belongs to Peregrine to Peregrine's own net income to arrive at Peregrine's investment income from Serine for 2014.

Peregrine's own net income is $750,000.

Therefore, Peregrine's investment income from Serine for 2014 would be:

Peregrine's Net Income + (Peregrine's Share of Serine's Net Income)
= $750,000 + $220,000
= $970,000

However, we need to adjust this amount for the excess depreciation on the truck.

The excess depreciation on the truck is the difference between the depreciation that Peregrine is taking on the truck and the depreciation that Serine would have taken on the truck if it hadn't sold it.

Since Peregrine is depreciating the truck over 10 years using the straight-line method, the annual depreciation expense is $4,500 ($45,000/10 years).

If Serine hadn't sold the truck, it would also have depreciated it over 10 years using the straight-line method. Therefore, its annual depreciation expense would have also been $4,500.

Since the truck was sold at the beginning of the year, Serine would have recognized depreciation expense for only six months ($4,500/2 = $2,250).

Therefore, the excess depreciation on the truck is:

Peregrine's Depreciation Expense - Serine's Depreciation Expense
= $10,000 - $2,250
= $7,750

We need to subtract the excess depreciation on the truck from Peregrine's investment income from Serine for 2014 to arrive at the correct amount.

Peregrine's Investment Income from Serine for 2014
= $970,000 - $7,750
= $962,250

Therefore, the best choice is C) $147,600.

Peregrine Corporation Acquired an 80% Interest in Serine Corporation in 2011