Company P purchased an 80% interest in Company S on January 1, 2016, for $800,000.On the purchase date, Company S stockholders' equity was $800,000.Any excess of fair value over book value was attributed to a patent with a 10-year remaining life.In 2016, 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.The tax on subsidiary earnings is

Question

Quizplus · Accepted Answer

First, we need to calculate the subsidiary net income after taxes. 
Company S net income before taxes: $70,000 
Tax on Company S earnings: $70,000 x 30% = $21,000 
Subsidiary net income after taxes: $70,000 - $21,000 = $49,000

Next, we need to calculate the consolidated net income before taxes. 
Consolidated net income before taxes: $150,000 + $49,000 = $199,000

Finally, we can calculate the tax on consolidated earnings. 
Tax on Consolidated earnings: $199,000 x 30% = $59,700

Therefore, the tax on subsidiary earnings is $21,000 and the answer is B ($16,200 = $21,000 x 80%).

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