Question

On January 1, two years ago, Parkway Corporation purchased all of the outstanding common stock of Shaw Company for $220,000 cash. On that date, Shaw's net assets had a book value of $148,000. Equipment with an 8-year life was undervalued by $20,000 in Shaw's financial records. Shaw has a database that is valued at $52,000 and will be amortized over ten years. Shaw reported net income of $25,000 in the year of acquisition and $32,500 in the following year. Dividends of $2,500 were declared and paid in each of those two years.

The third year of operations is now complete. For each of the two companies, selected account balances as of December 31 for this third year are as follows: Park way ShawRevenues 250,000 142,500Expenses 175,000 100,000 Equipment 125,000 60,000 Retained earnings, begining of the year 150,000 75,000Dividend paid 25,000 5,000What is consolidated net income for the third year of operations if the parent company uses the partial equity method?
A) $109,800
B) $112,000
C) $115,000
D) $117,500
E) $113,500

Answer 1

A) $109,800

Step-by-step explanation:

The computation of the consolidated net income using the partial equity method is as follows;

= Park way revenue + Shaw revenue - part way expenses - shaw expenses - dividend declared - amortization expenses

= $25,0000 + $142,500 - $175,000 - $100,000 - $2,500 - ($52,000 ÷ 10 years)

= $109,800

Hence, the correct option is A.