Jay Inc. owns 80% of Tesla Inc. and uses the cost method to account for its investment. The 2020 income statements of both companies are shown below. $$30,000$9,000\begin{array} { | l | r | r | } \hline & \text { Jay } & \text { Tes1a } \\\hline \text { Gross Profit } & \$ 100,000 & \$ 50,000 \\\hline \text { Miscellareous } & \$ 30,000 & \$ 20,000 \\\text { Reverues/Losses } & & \\\hline \text { Depreciation Expense } & \$ 20,000 & \$ 15,000 \\\hline \text { Income Tax Expense } & \$ 20,000 & \$ 6,000 \\\hline \text { Net Income } & \$ 30,000 & \$ 9,000 \\\hline\end{array}$ On January 1, 2020, Tesla sold equipment to Jay at a profit of $3,000. The equipment had a remaining useful life of twenty years on that date. Both companies are subject to an effective tax rate of 40%.
The controlling interest (attributable to the shareholders of Jay) in Jay's 2020 Consolidated Net Income would be:

A) $30,000.
B) $35,832.
C) $36,000.
D) $37,200.

Question

Jay Inc. owns 80% of Tesla Inc. and uses the cost method to account for its investment. The 2020 income statements of both companies are shown below.

$30,000$9,000\begin{array} { | l | r | r | } \hline & \text { Jay } & \text { Tes1a } \\\hline \text { Gross Profit } & \$ 100,000 & \$ 50,000 \\\hline \text { Miscellareous } & \$ 30,000 & \$ 20,000 \\\text { Reverues/Losses } & & \\\hline \text { Depreciation Expense } & \$ 20,000 & \$ 15,000 \\\hline \text { Income Tax Expense } & \$ 20,000 & \$ 6,000 \\\hline \text { Net Income } & \$ 30,000 & \$ 9,000 \\\hline\end{array}

On January 1, 2020, Tesla sold equipment to Jay at a profit of $3,000. The equipment had a remaining useful life of twenty years on that date. Both companies are subject to an effective tax rate of 40%.
The controlling interest (attributable to the shareholders of Jay) in Jay's 2020 Consolidated Net Income would be:

A) $30,000.
B) $35,832.
C) $36,000.
D) $37,200.

Josiah Sandoval · Accepted Answer

Final Answer : B, Explanation :  First, let's calculate Tesla's net income for 2020:$50,000 - $3,000 = $47,000 (before taxes)$47,000 x 0.6 = $28,200 (after taxes)Now, let's calculate the income from Tesla that Jay would report using the cost method:0.8 x $28,200 = $22,560Next, let's add in the profit from the sale of equipment:$3,000 x 0.6 = $1,800 (after taxes)0.8 x $1,800 = $1,440Finally, let's add up Jay's total net income for 2020:$48,000 (Jay's net income) + $22,560 (income from Tesla) + $1,440 (profit from sale of equipment) = $72,000However, we need to adjust for the fact that 20% of the net income is attributable to non-controlling interest:$72,000 x 0.8 = $57,600So the controlling interest (attributable to the shareholders of Jay) in Jay's 2020 Consolidated Net Income would be $57,600, which matches answer choice B.

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