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

question 28

Multiple Choice

Company P purchased an 80% interest in Company S on January 1, 20X3, 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 20X3, 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

• A)$20,000
• B)$16,200
• C)$15,000
• D)$10,000

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Definitions:

Net Sales

The amount of sales generated by a company after deducting returns, allowances for damaged or missing goods, and discounts.

Account Receivable

Accounts Receivable are amounts owed to a company by its customers for goods or services that have been delivered or used but not yet paid for.

Write Off

An accounting action taken to recognize that an asset has lost its value and is removed from the balance sheet.

Cash

Money in the form of coins or banknotes, especially that used to operate a business on a day-to-day basis.