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 consolidated net income is

Question

Quizplus · Accepted Answer

To calculate consolidated net income, we need to first calculate the separate net income of Company P and Company S.

Company P net income = $150,000 * 80% = $120,000 
Company S net income = $70,000

Next, we add the two net incomes to get the consolidated net income before taxes:

Consolidated net income before taxes = $120,000 + $70,000 = $190,000

We then apply the tax rate of 30% to get the consolidated net income:

Consolidated net income = $190,000 * (1 - 0.30) = $133,000

Finally, we add back the portion of the excess of fair value over book value that was attributed to the patent:

Consolidated net income = $133,000 + ($800,000 - $800,000)/10 = $138,800

Therefore, the correct answer is (C) $138,800.

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