Reference no: EM132825007
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.
Problem 1: 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