Assume that, on January 1, 2019, P Company acquired a 70% interest in its subsidiary, S Company. The aggregate fair value of the controlling and noncontrolling interest was $400,000 in excess of S Company's Stockholders' Equity on the acquisition date. The parent uses the equity method to account for its investment in S company. The parent assigned the acquisition accounting premium (AAP) as follows:

AAP Item

Initial Fair Value

Useful Life (years)

PPE, net

$220,000

10

Customer List

120,000

10

Goodwill

60,000

Indefinite

$400,000

P Company and S Company report the following financial statements at December 31, 2023:

Income Statement

Parent

Subsidiary

Sales

$6,500,000

$600,000

Cost of goods sold

-4,250,000

-350,000

Gross Profit

2,250,000

250,000

Income (loss) from subsidiary

74,000

Operating expenses

-1,250,000

-142,000

Net income

$1,074,000

$108,000

Statement of Retained Earnings

Parent

Subsidiary

BOY Retained Earnings

$7,900,000

$958,000

Net income

1,074,000

108,000

Dividends

-102,540

-18,750

EOY Retained Earnings

$8,871,460

$1,047,250

Balance Sheet

Parent

Subsidiary

Assets:

Cash

$500,000

$250,000

Accounts receivable

2,045,000

425,000

Inventory

657,000

624,500

Equity Investment

1,331,475

PPE, net

9,507,985

511,750

$14,041,460

$1,811,250

Liabilities and Stockholders' Equity:

Current Liabilities

$900,000

$370,000

Long-term Liabilities

1,570,000

0

Common Stock

600,000

42,000

APIC

2,100,000

352,000

Retained Earnings

8,871,460

1,047,250

$14,041,460

$1,811,250

15.Based on the given financial statements, the computation of the pre-consolidation income (loss) from subsidiary of $74,000 reported by the parent includes a deduction for:

a.$25,000 for excess attributable to depreciation and amortization

b.$34,000 for excess attributable to depreciation and amortization

c.$13,125 for 70% of dividends declared and paid by S Company

d.$75,600 for 70% of the net income of subsidiary

16.The December 31, 2023 pre-consolidation balance of the equity investment accounting equals $1,331,475 (i.e., 5 years subsequent to the acquisition).

On this date, the equity investment balance implicitly includes:

a.Dividends, $121,290

b.Goodwill, $60,000

c.Goodwill, $48,000

d.Unamortized AAP excluding Goodwill, $204,000