Parent Company Inc. successfully bids for Child Company Inc. in year X1. Parent Company Inc. has purchased all of Child's shares outstanding for $8,500. Following are excerpts from both companies' financial statements for year X1, prior to the acquisition.
$$\begin{array} { | l | l | l | }
\hline & \text { Parent Company Inc. } & \text { Child Company Inc. } \
\hline \text { Total Assets } & \$ 37,234 & \$ 5,379 \
\hline \text { Total Liabilities } & \$ 23,467 & \$ 3,764 \
\hline \text { Total Shareholder's Equity } & \$ 13,767 & \$ 1,615 \
\hline \begin{array} { l }
\text { Total Liabilities and } \
\text { Shareholders' Equity }
\end{array} & \$ 37,234 & \$ 5,379 \
\hline
\end{array}$$ Also assume the following information: the acquisition was accounted for using the purchase method. $1,500 of the excess price relates to depreciable assets, and those assets have an additional useful life of 10 years at the time of the acquisition. Parent Company Inc. uses the straight line depreciation method and has a 34% tax rate. The combined net income for both companies for year X2 (excluding any expenses that need to be recorded as a result of the purchase method accounting for the merger) was $1,560.
-What would be the net income in the consolidated income statement for year X2?

Question

Parent Company Inc. successfully bids for Child Company Inc. in year X1. Parent Company Inc. has purchased all of Child's shares outstanding for $8,500. Following are excerpts from both companies' financial statements for year X1, prior to the acquisition.
 $$\begin{array} { | l | l | l | } 
\hline & \text { Parent Company Inc. } & \text { Child Company Inc. } \
\hline \text { Total Assets } & \$ 37,234 & \$ 5,379 \
\hline \text { Total Liabilities } & \$ 23,467 & \$ 3,764 \
\hline \text { Total Shareholder's Equity } & \$ 13,767 & \$ 1,615 \
\hline \begin{array} { l } 
\text { Total Liabilities and } \
\text { Shareholders' Equity }
\end{array} & \$ 37,234 & \$ 5,379 \
\hline
\end{array}$$ Also assume the following information: the acquisition was accounted for using the purchase method. $1,500 of the excess price relates to depreciable assets, and those assets have an additional useful life of 10 years at the time of the acquisition. Parent Company Inc. uses the straight line depreciation method and has a 34% tax rate. The combined net income for both companies for year X2 (excluding any expenses that need to be recorded as a result of the purchase method accounting for the merger) was $1,560.
-What would be the net income in the consolidated income statement for year X2?

Quizplus · Accepted Answer

To calculate the consolidated net income, we need to adjust the excess price related to depreciable assets. We will subtract the additional depreciation expense of $150 per year (i.e. $1,500/10) from the total net income. Also, we need to consider the tax effect of the additional depreciation expense, which will reduce the tax liability and increase the net income. Therefore, the net income in the consolidated income statement for year X2 would be:

$1,560 - $150 + (0.34 x $150) = $1,461

Hence, the best choice is option A.

Parent Company Inc Also Assume the Following Information: the Acquisition Was Accounted for Year