Reference no: EM132892584
Question - On January 1, Year 1, Present Inc. purchased 80 percent of the outstanding voting shares of Sunset Co. for $3,500,000. On that date, Sunset's shareholders' equity consisted of retained earnings of $1,700,000 and common shares of $1,175,000. Sunset's identifiable assets and liabilities had fair values that were equal to their carrying values on January 1, Year 1.
Account balances for selected accounts for the Year 5 financial statements were as follows:
Present Sunset
Property, plant, and equipment (net) $ 2,100,000 $ 3,500,000
Common shares $ 1,500,000 $ 1,000,000
Retained earnings, beginning of Year 5 $2,600,000 $ 2,800,000
Depreciation expense $ 250,000 $ 300,000
Income tax expense $ 300,000 $ 350,000
Net income $ 450,000 $ 525,000
Dividends paid $ 300,000 $ 0
Additional Information
Present carries its investment in Sunset on its books by the cost method.
At the beginning of Year 4, Sunset sold Present a machine for its fair value of $900,000. Sunset hadpurchased the machine in Year 1. The carrying amount at the time of the sale to Present was $720,000.The machine had an estimated remaining useful life of nine years on the date of the intercompany sale.
Any goodwill arising from the business combination is to be tested annually for impairment. Goodwillhas not been impaired in any year since the date of acquisition.
Both companies use the straight-line method for depreciation.
Both companies are taxed at 40 percent.
What is the income tax expense on the consolidated income statement for Year 5?
a) $642,000
b) $650,000
c) $678,000
d) $666,000