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