Question

Cashen Co. paid $2,400,000 to acquire all of the common stock of Janex Corp. on January 1, 2017. Janex's reported earnings for 2017 totaled $432,000, and it paid $120,000 in dividends during the year. The amortization of allocations related to the investment was $24,000. Cashen's net income, not including the investment, was $3,180,000, and it paid dividends of $900,000.
What is the amount of consolidated net income for the year 2010?
(A) $3,180,000.
(B) $3,612,000.
(C) $3,300,000.
(D) $3,588,000.
(E) $3,420,000.

Answer 1

Answer:

(D) $3,588,000.

Explanation:

Consolidated net income is defined as the sum of net income of the parent company (minus income from investment in subsidiary and unrealized income from downstream sales) plus net income of subsidiaries, which results after deducting depreciation (or amortization), income from transactions with the parent company and unrealized gains in inventories.

In the example, the parent company is Cashen Co. and the subsidiary is Janex´s. Recall that a parent company is one that owns more than 50 percent of the shares of the subsidiary, in this case, it is 100%.

According to the information provided, Cashen Co's net income was $ 3,180,000 and neither income from investment in subsidiary nor unrealized income from downstream sales is reported, so it is not necessary to subtract anything.

On the other hand, we know that Janex´s reported earnings totaled $432,000. However, the amortization of allocations related to the investments ($ 24,000) must be subtracted here. Therefore, the net income of that company was $408,000 ($432.000 - $24.000).

Finally, we add the net income of both companies. That is, $ 3,180,000 + $ 408,000 = $ 3,588,000.

Note: I want to point out that there is a typo in the question. It says: "What is the amount of consolidated net income for the year 2010?", instead of "What is the amount of consolidated net income for the year 2017?"