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On January 1, 2017, Portland Company acquired all of Salem Companys voting stock for $16,000,000 in cash. Some of Salems assets and liabilities at the

On January 1, 2017, Portland Company acquired all of Salem Company’s voting stock for $16,000,000 in cash. Some of Salem’s assets and liabilities at the date of purchase had fair values that differed from reported values, as follows:

Book valueFair value
Buildings and equipment, net (20 years, straight-line)$11,000,000$ 3,000,000
Identifiable intangibles (5 years, straight-line)010,000,000

Salem’s total shareholders’ equity at January 1, 2017, was $4,000,000. It is now December 31, 2020 (four years later). Salem’s retained earnings reflect the accumulation of net income less dividends; there have been no other changes in its retained earnings. Salem does not report any other comprehensive income. Cumulative goodwill impairment to the beginning of 2020 is $2,000,000. Goodwill impairment for 2020 is $500,000. Portland uses the complete equity method to account for its investment. The December 31, 2020, trial balance for Salem appears below.

Salem Dr (Cr)
Current assets$2,500,000
Plant assets, net28,000,000
Liabilities(10,000,000)
Capital stock(2,000,000)
Retained earnings, January 1(16,000,000)
Sales revenue(14,000,000)
Cost of goods sold8,000,000
Operating expenses3,500,000
$ 0

What is 2020 equity in net income of Salem, reported on Portland’s books using the complete equity method?

A. $ 400,000

B. $ 900,000

C. $1,200,000

D. $2,500,000

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