Question

Paiva Corporation owns 80% of Ackroyd Corporation's outstanding common stock and Ackroyd owns 80% of the outstanding common stock of Bailey Corporation. Bailey Corporation owns 10% of the outstanding common stock of Ackroyd Corporation. The cost of the investments was equal to book value and there were not fair value/book value differences for the investments. The separate net incomes for the three affiliated companies for the year ended December 31, 2014 (excluding investment income) are as follows: Paiva Corporation, $100,000, Ackroyd Corporation, $50,000, and Bailey Corporation, $30,000. Use the conventional approach. 4

Symbols used:

P = Income of Paiva on a consolidated basis
A = Income of Ackroyd on a consolidated basis
B = Income of Bailey on a consolidated basis

The equation, in a set of simultaneous equations, that computes Paiva Corporation income on a consolidated basis is:

A) P = $50,000 + 0.8B.
B) P = $30,000 + 0.2A.
C) P = $100,000 + 0.2A.
D) P = $100,000 + 0.8A.

Answer 1

The correct equation to calculate the consolidated net income for Paiva Corporation, which owns 80% of Ackroyd Corporation, is P = $100,000 + 0.8A, where P is Paiva's consolidated income and A is Ackroyd's income.

Step-by-step explanation:

The student is seeking help with a specific consolidation accounting problem, which involves calculating the consolidated net income for a parent corporation (Paiva Corporation) with ownership interests in subsidiaries (Ackroyd Corporation and Bailey Corporation). In consolidated financial statements, the parent corporation's income on a consolidated basis includes its own net income plus its share of the net incomes of any subsidiaries after eliminating any intra-group investments.

The correct equation to compute Paiva Corporation's income on a consolidated basis, given the provided ownership percentages and ignoring any intra-group ownership for this example, is P = $100,000 + 0.8A. Here, $100,000 is the separate net income of Paiva Corporation, and 0.8A represents Paiva's 80% share of Ackroyd Corporation's net income on a consolidated basis.