Jay Inc. owns 80% of Tesla Inc. and uses the cost method to account for its investment. The 2020 income statements of both companies are shown below. $$\begin{array} { | l | r | r | }
\hline & \text { Jay } & \text { Tes1a } \
\hline \text { Gross Profit } & \$ 100,000 & \$ 50,000 \
\hline \text { Miscellareous } & \$ 30,000 & \$ 20,000 \
\text { Reverues/Losses } & & \
\hline \text { Depreciation Expense } & \$ 20,000 & \$ 15,000 \
\hline \text { Income Tax Expense } & \$ 20,000 & \$ 6,000 \
\hline \text { Net Income } & \$ 30,000 & \$ 9,000 \
\hline
\end{array}$$ On January 1, 2020, Tesla sold equipment to Jay at a profit of $3,000. The equipment had a remaining useful life of twenty years on that date. Both companies are subject to an effective tax rate of 40%.
The controlling interest (attributable to the shareholders of Jay) in Jay's 2020 Consolidated Net Income would be:

Question

Jay Inc. owns 80% of Tesla Inc. and uses the cost method to account for its investment. The 2020 income statements of both companies are shown below. $$\begin{array} { | l | r | r | } 
\hline & \text { Jay } & \text { Tes1a } \
\hline \text { Gross Profit } & \$ 100,000 & \$ 50,000 \
\hline \text { Miscellareous } & \$ 30,000 & \$ 20,000 \
\text { Reverues/Losses } & & \
\hline \text { Depreciation Expense } & \$ 20,000 & \$ 15,000 \
\hline \text { Income Tax Expense } & \$ 20,000 & \$ 6,000 \
\hline \text { Net Income } & \$ 30,000 & \$ 9,000 \
\hline
\end{array}$$ On January 1, 2020, Tesla sold equipment to Jay at a profit of $3,000. The equipment had a remaining useful life of twenty years on that date. Both companies are subject to an effective tax rate of 40%.
The controlling interest (attributable to the shareholders of Jay) in Jay's 2020 Consolidated Net Income would be:

Quizplus · Accepted Answer

First, let's calculate Tesla's net income for 2020:
$50,000 - $3,000 = $47,000 (before taxes)
$47,000 x 0.6 = $28,200 (after taxes)

Now, let's calculate the income from Tesla that Jay would report using the cost method:
0.8 x $28,200 = $22,560

Next, let's add in the profit from the sale of equipment:
$3,000 x 0.6 = $1,800 (after taxes)
0.8 x $1,800 = $1,440

Finally, let's add up Jay's total net income for 2020:
$48,000 (Jay's net income) + $22,560 (income from Tesla) + $1,440 (profit from sale of equipment) = $72,000

However, we need to adjust for the fact that 20% of the net income is attributable to non-controlling interest:
$72,000 x 0.8 = $57,600

So the controlling interest (attributable to the shareholders of Jay) in Jay's 2020 Consolidated Net Income would be $57,600, which matches answer choice B.

Jay Inc Owns 80% of Tesla Inc On January 1, 2020, Tesla Sold Equipment to Jay at Cost