Chapter 9 Test Bank

INDIRECT AND MUTUAL HOLDINGS

Multiple Choice Questions

LO1
1.

Pallet Corporation owns 80% of Adelt Corporation and Adelt owns

60% of Bajo Inc. Which of the following is correct?
a. Bajo should not be consolidated because minority interests
hold 52%.
b. Bajo should be consolidated because the 60% of Bajo stock
is held in the affiliate structure.
c. Pallet has 8% indirect ownership of Bajo.
d. Pallet has 80% indirect ownership of Bajo.

LO1
2.

Page Corporation acquired a 60% interest in Ace Corporation at

a price $40,000 in excess of book value and fair value on
January 1, 2005. On the same date, Ace acquired a 70% interest
in Bader Corporation at a price $30,000 in excess of book value
and fair value. The excess purchase cost paid by Page and Ace
was attributed to goodwill. Separate incomes (excluding
investment income) for the three affiliates for 2005 are as
follows: Page, $500,000, Ace, $300,000, and Bader, $400,000.
Pages net income for 2005 is
a.
b.
c.
d.

$808,000.
$848,000.
$920,000.
$960,000.

Use the following information in answering questions 3, 4, and 5.

Paint Corporation owns 82% of Achille corporation and Achille
Corporation owns 80% of Badrack Corporation. For the current year,
the separate incomes of Paint, Achille, and Badrack are $120,000,
$100,000, and $50,000, respectively.

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LO1
3.

Noncontrolling interest expense from Badrack is

a.
b.
c.
d.

LO1
4.

LO1
5.

LO1
6.

$9,000.
$10,000.
$20,000.
$40,000.

Noncontrolling interest from Achille is

a.
b.
c.
d.

$18,000.
$25,200.
$36,200.
$72,000.

Consolidated net income for Paint Corporation and Subsidiaries

can be determined by the equation:
a.
b.
c.
d.

$234,000.
$244,800.
$260,000.
$270,000.

Pabari Corporation owns an 80% interest in Alders Corporation

and Alders owns a 60% interest in Babao Corporation. Both
interests were acquired at book value equal to fair value.
During 2005, Alders sells land to Babao at a profit of $12,000.
Babao still holds the land at December 31, 2005. Profits and
(losses) of the three companies for 2005 are:
Pabari Corporation
Alders Corporation
Babao Corporation

$180,000
72,000
(30,000)

Consolidated net income and noncontrolling interest (loss),

respectively, for 2005 are
a. $211,200 and ($1,200).
b. $211,200 and ($3,600).
c. $213,600 and ($1,200).
d. $213,600 and ($3,600).

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LO1
7.

Pablo Corporation acquired 60% of Abagia Corporation on January

1, 2004, at a cost of $20,000 in excess of book value. Also, on
July 1, 2004, Pablo acquired 60% of Babin Corporation at book
value. On January 1, 2005, Abagia acquired a 20% interest in
Babin at a cost of $10,000 in excess of book value. The excess
purchase costs paid by Pablo and Abagia were attributed to
goodwill.
On July 1, 2005, Pablo sold land with a book value of $20,000
to Abagia for $40,000. The $20,000 unrealized gain is included
in Pablos separate income. Separate incomes for the affiliated
companies (excluding investment income) for 2005 are:
Pablo
Abagia
Babin

$250,000
70,000
100,000

Consolidated net income for the three affiliates is

a.
b.
c.
d.

$304,000.
$324,000.
$344,000.
$364,000.

Use the following information for Questions 8, and 9.

Paisley Corporation owns 90% of Ackers Company. Akers Company owns
60% of Baglin. Paisleys separate income for the current year is
$540,000. Akerss separate income is $240,000. Baglins separate
income is $150,000.
LO1
8.
The formula for the consolidated noncontrolling interest is
calculated as
a. 10% X $240,000.
b. (10% X $240,000) + (6% X $150,000).
c. (10% X $240,000) + (40% X $150,000).
d. (10% X $240,000) + (46% X $150,000).
LO1
9.

The formula for consolidated net income is calculated as

a.
b.
c.
d.

$930,000 ($240,000 X 10%)

$930,000 ($240,000 X 10%) ($150,000 X 40%)
$930,000 ($240,000 X 10%) ($150,000 X 46%)
$930,000 ($240,000 X 10%) ($150,000 X 40%)
($150,000 X 10% X 50%)

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LO1
10.

Paglia Corporation owns 80% of Aburn Corporation and has

separate income of $200,000 for 2005. Aburn Corporation has
separate income of $100,000 and owns 70% of the outstanding
stock of Badley Corporation. Badley Corporation has separate
income of $80,000. The correct amount of consolidated net
income is
a.
b.
c.
d.

$324,800.
$328,800.
$344,800.
$344,800.

Use the following information for Questions 11, 12, and 13.
Pace Corporation owns 70% of Abaza Corporation and 60% of Babon
Corporation. Abaza Corporation owns 20% of Babon Corporation. Paces
investment in Abaza was consummated in one transaction at a purchase
price $20,000 in excess of the book value. Paces purchase of Babon
was made in one transaction at a price $30,000 above book value.
Abazas investment in Babon was completed in one transaction at a
purchase price $10,000 in excess of the book value. The purchase
price differential for all three investments was attributable to
goodwill. Paces separate income for the current year is $100,000.
Abazas separate income is $190,000, which includes a $10,000
unrealized loss on the sale of land to Pace. Babons separate income
is $150,000.
LO1
11.
The amount of consolidated net income for Pace Corporation and
Abaza for the current year is

LO1
12.

LO1
13.

a.
b.
c.
d.

$341,000.
$348,400.
$351,000.
$355,000.

The amount of noncontrolling interest expense for the current

year is
a.
b.
c.
d.

$69,000.
$85,000.
$95,000.
$99,000.

The amount of goodwill in Paces consolidated balance sheet is

a.
b.
c.
d.

$50,000.
$52,000.
$58,000.
$60,000.
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Use the following information for Questions 14 through 18.

Pahm Corporation owns 80% of the outstanding voting common stock of
Abussi Corporation, which was purchased for $60,000 over Abussis
book value. The excess purchase price was attributable to goodwill.
Abussi Corporation owns 60% of the outstanding common stock of Badock
Corporation, which was purchased at book value. The separate incomes
of Pahm, Abussi, and Badock for the year are $200,000, $240,000, and
$260,000, respectively.
LO1
14.
Consolidated net income for the current year is

LO1
15.

LO1
16.

LO1
17.

LO1
18.

a.
b.
c.
d.

$504,800.
$516,200.
$545,200.
$557,200.

The amount of income for the current year assigned to the

minority shareholders of Badock Corporation is
a.
b.
c.
d.

$100,000.
$104,000.
$120,000.
$140,000.

The amount of income for the current year assigned to the

minority shareholders of Abussi Corporation is
a.
b.
c.
d.

$48,000.
$53,200.
$74,000.
$79,200.

The amount of income assigned to the noncontrolling interest in

the current years consolidated income statement is
a.
b.
c.
d.

$142,800.
$154,800.
$183,200.
$195,200.

The net income recorded on the books of Pahm Corporation for

the current year is
a.
b.
c.
d.

$504,800.
$516,800.
$545,200.
$557,200.
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Use the following information for Questions 19 and 20.

Paiva Corporation owns 80% of Ackroyd Corporations 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 separate incomes for the
three affiliated companies for the year ended December 31, 2005
(excluding investment income) are as follows: Paiva Corporation,
$100,000, Ackroyd Corporation, $50,000, and Bailey Corporation,
$30,000.

LO2
19.

LO2
20.

Notations for
P = Income of
A = Income of
B = Income of

question 19 are:
Paiva on a consolidated basis
Ackroyd on a consolidated basis
Bailey on a consolidated basis

The equation, in a set of simultaneous equations, that computes

Paiva Corporation is
a.
b.
c.
d.

P
P
P
P

=
=
=
=

$50,000 + .8B.
$30,000 + .2A.
$100,000 + .2A.
$100,000 + .8A.

Ackroyds noncontrolling
income for 2005 is
a.
b.
c.
d.

interest

in

the

total

consolidated

$ 7,609.
$ 8,044.
$15,652.
$23,696.

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LO1
Exercise 1
Paice Corporation owns 80% of the voting common stock of Accardi
Corporation and 60% of the voting common stock of Badger Corporation.
Accardi owns 20% of the voting common stock of Badger. There are no
cost-book differentials to consider. The separate incomes of these
affiliated companies for 2005 are:
Paice
Accardi
Badger

$300,000
160,000
120,000

Required:
Calculate
consolidated
Subsidiaries for 2005.

net

income

for

Paice

Corporation

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and

LO1
Exercise 2
Pacini Corporation owns an 80% interest in Abdoo Corporation,
acquired on January 1, 2004 for $700,000 when Abdoos stockholders
equity consisted of $600,000 of Capital Stock and $200,000 of
Retained Earnings.
Abdoo Corporation acquired a 60% interest in Bach Corporation on July
1, 2004 for $180,000 when Bach had Capital Stock of $200,000 and
Retained Earnings of $50,000. On January 1, 2005, Abdoo acquired a
70% interest in Cabo Corporation for $270,000 when Cabo had Capital
Stock of $250,000 and Retained Earnings of $100,000.
No change in outstanding stock of any of the affiliated companies has
occurred since the investments were made. All cost-book differentials
are goodwill. The stockholders equity section of the separate
balance sheets of Abdoo, Bach, and Cabo at December 31, 2005 are as
follows:
Capital Stock
Retained Earnings
Total stockholders equity

$
$

Abdoo
600,000
280,000
880,000

$
$

Bach
200,000
140,000
340,000

$
$

Cabo
250,000
130,000
380,000

Required:
1. Compute the amount at which goodwill should be shown in the
consolidated
balance
sheet
of
Pacini
Corporation
and
Subsidiaries at December 31, 2005.
2. Pacini and Abdoo have applied
Determine the balances of the
December 31, 2005.

the equity method correctly.

three investment accounts at

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LO1
Exercise 3
Paik Corporation owns 80% of Acdol Corporation and 60% of
Corporation.
Acdol Corporation owns 10% of Ben Corporation.
subsidiary investments were acquired at book value equal to
value. Separate incomes (excluding investment income) of
affiliated companies for 2005 are:
Paik:

Ben
All
fair
the

$600,000 which includes $60,000 unrealized losses on inventory

items sold to Ben

Acdol: $360,000
Ben:

$340,000 which includes $100,000 unrealized profit on land

sold to Acdol

Required:
Determine consolidated net income and noncontrolling interest expense
for Paik Corporation and Subsidiaries for 2005.
LO1
Exercise 4
Packer Corporation owns 100% of Abel Corporation, Abel Corporation
owns 95% of Bacon Corporation and Bacon Corporation owns 80% of Cab
Corporation. The separate incomes of Packer, Abel, Bacon, and Cab are
$300,000, $100,000, $200,000, and $300,000, respectively. All of the
investments were made at times when the investees book values were
equal to their fair values.
Required:
Determine the consolidated net income and noncontrolling interest
expense for Packer Corporation and Subsidiaries for the current year.

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LO1
Exercise 5
On January 1, 2005 Paki Inc. bought 75% interest in Adam Corporation.
At the time of purchase, Adam owned 80% of Baird Company and 10% of
Castle Corporation.
In all acquisitions the book value equals the
fair value. Separate earnings for the three affiliates for 2005 are
as follows:

Paki Company
Adam Inc
Baird Company
Castle Company

Separate
Earnings
$400,000
(50,000 )
100,000
225,000

Dividends
$150,000
90,000
35,000
80,000

Required:
Compute consolidated net income and noncontrolling interest expense
for Paki for 2005.
LO2
Exercise 6
Paco Corporation owns 90% of Aber Corporation, Aber Corporation owns
85% of Back Corporation, and Back Corporation owns 5% of Aber
Corporation. The separate incomes (excluding investment income), of
Paco,
Aber,
and
Back
are
$100,000,
$40,000,
and
$55,000,
respectively.
Required:
Calculate revised net incomes for Paco, Aber, and Back by including
the correct amount of investment income for each company. Use the
conventional method for your solution.

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LO2
Exercise 7
Paine Corporation owns 90% of Achan Corporation, Achan Corporation
owns 85% of Badge Corporation, and Badge Corporation owns 5% of Achan
Corporation. The separate incomes (excluding investment income), of
Paine, Achan, and Badge are $400,000, $160,000, and $220,000,
respectively.
Required:
Calculate the consolidated net income for Paine Corporation and its
subsidiaries, Achan, and Badge. Use the treasury stock method for
your solution.
LO2
Exercise 8
Separate earnings and investment percentages for the three affiliates
for 2005 are as follows:
Separate
Earnings
Palace Company
Acres Inc
Bain Corporation

450,000
200,000
160,000

Percentage
Interest in
Acres
80%
10%

Percentage
Interest
in Bain
70%

Required:
Compute consolidated net income for Palace for 2005.

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LO2
Exercise 9
Padhy Corporation owns 80% of Abrams Corporation, Abrams Corporation
owns 60% of Bacud Corporation, and Bacud Corporation owns 10% of
Padhy Corporation. The separate incomes (excluding investment
income), of Padhy, Abrams, and Bacud are $300,000, $100,000, and
$80,000, respectively.
Required:
Calculate the consolidated net income for Padhy Corporation and its
subsidiaries, Abrams and Bacud. Use the conventional method for your
solution.

LO2
Exercise 10
Padua Corporation owns 80% of Able Corporation, Able Corporation owns
60% of Baden Corporation, and Baden Corporation owns 10% of Padua
Corporation. The separate incomes (excluding investment income), of
Padua, Able, and Baden are $300,000, $100,000, and $80,000,
respectively.
Required:
Calculate the consolidated net income for Padua Corporation and its
subsidiaries, Able and Baden. Use the treasury stock method for your
solution.

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SOLUTIONS
Multiple Choice Questions
1

Separate incomes
$
Allocate 70% of Bader to Ace
Allocate 60% of Ace to Page
Pages net income

Page
500,000
348,000
848,000

Noncontrolling interest
expense

Ace
300,000

280,000
(
348,000 )

280,000 )

232,000

120,000

Bader
400,000

From Badrack: .20 x $50,000 =

10,000

25,200

Noncontrolling interest expense:

From Badrack: .20 x $50,000 =

10,000

From Achille: (.18)x[$100,000 + (.80)x($50,000)]

25,200

Total minority income

36,200

Combined separate incomes

Less: Noncontrolling interest expense
Consolidated net income

From Achille: (.18)x[$100,000 + (.80)x($50,000)]

5

270,000
36,200 )
234,800

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Noncontrolling interest net loss: $8,400 + ($12,000) =

($3,600)

Separate incomes
$
Less: Unrealized profit on
land
Subtotal
$
Allocate Babaos net loss to
Alders ($30,000) x 60%
Allocate 80% of Alders
income to Pabari
Consolidated net income
$

Pabari
180,000

180,000

(
$

12,000 )
60,000

18,000 )

33,600 )

33,600
213,600

Noncontrolling interest
expense

Alders
72,000

$(

Babao
30,000 )

$(

30,000 )
18,000

8,400

$(

(12,000 )

Abagia
70,000

Babin
100,000

20,000 )
230,000
$

70,000

100,000

20,000

(
(

60,000 )
20,000 )

20,000

Separate incomes
$
Less: Unrealized profit on
land
(
Separate realized incomes
$
Allocate Babins income:
60% to Pablo
20% to Abagia
Allocate Abagias net income
$90,000 x 60%

Consolidated net income

Noncontrolling interest
expense

Pablo
250,000

60,000
54,000

54,000 )

36,000

344,000

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10

Separate incomes
Allocate Badleys income:
70% to Aburn
Subtotal
Allocate Aburns income:
80% to Paglia
Consolidated net income

Paglia
200,000

Aburn
100,000

$
$

200,000

56,000
156,000

(
$

56,000 )
24,000

124,800
324,800

124,800 )
$

24,000

Noncontrolling interest
expense

11

32,200

Badley
80,000

Separate incomes
Plus: Unrealized loss on
land sale to Pace
Separate realized incomes
Allocate Babons income:
60% to Pace
20% to Abaza
Subtotal
Allocate Abazas net income
to Pace $230,000 x 70%

Pace
100,000

Abaza
190,000

Babon
150,000

100,000

10,000
200,000

150,000

Consolidated net income

90,000

30,000
230,000

190,000
161,000

(
(

90,000 )
30,000 )
30,000

30,000

161,000 )

351,000

Noncontrolling interest
expense

69,000

12

From Question 11: $69,000 + 30,000 = $99,000

13

14

$200,000 + (80%)x[$240,000 + (60%)x(260,000)] =

$516,200

15

40% x $260,000 = $104,000

16

(20% x $240,000) + (20% x $156,000) = $79,200

17

$79,200 + $104,000 = $183,200

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Separate incomes
Allocate Badocks income:
60% to Abussi
Subtotal
Allocate Abussis net income
to Pahm $396,000 x 80%

Consolidated net income

Pahm
200,000

Abussi
240,000

Badock
260,000

200,000

156,000
396,000

(
$

156,000 )
104,000

316,800

316,800 )

79 ,200

104,000

516,800

Noncontrolling interest
expense

18

19

20

Pahms separate net income

consolidated net income.

is

the

same

as

the

8,044

P = $100,000 + .8A
A = $50,000 + .8B
B = $30,000 + .1P
Computations:
A = $50,000 + .8 x ($30,000 + .1A)
A = $50,000 + $24,000 + .08S
A = $80,435 (rounded)
Noncontrolling interest expense
Ackroyd: $80,435 x 10% outside interest

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LO1
Exercise 1
Paice Corporation and Subsidiaries
Income Allocation Schedule
For the year 2005
Separate earnings
Allocate Badgers income:
60% to Paice
20% to Accardi
Subtotal
Allocate Accardis income:
80% to Paice
Consolidated net income

Paice
300,000

Accardi
160,000

$
(
(
$

72,000 )
24,000 )
24,000

24,000

72,000
$

372,000

24,000
184,000

147,200 )

147,200
519,200

Noncontrolling interest
expense

36,800

Badger
120,000

LO1
Exercise 2
Requirement 1:
Pacinis investment in Abdoo:
Goodwill at acquisition $700,000 cost
($800,000 x 80%) book value
$

60,000

Abdoos investment in Bach:

Goodwill at acquisition: $180,000 cost
($250,000 x 60%) book value acquired

30,000

Abdoos investment in Cabo:

Goodwill at acquisition: $270,000 cost
($350,000 x 70%) book value acquired
Total goodwill on December 31, 2005
Requirement 2:

Investment cost
Investors share of equity
since acquisition:
Abdoo: ($80,000 x 80%)
Bach: ($90,000 x 60%)
Cabo: ($30,000 x 70%)
Investment account balance

Pacini
Equity
in
Abdoo
700,000

25,000
115,000

Abdoos books
Equity
Equity
in Bach
in Cabo
$

64,000
$

764,000

180,000

270,000

21,000
291,000

54,000
$

234,000

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LO1
Exercise 3
Separate incomes
Plus: Unrealized loss on
inventory sales to Ben
Less: Unrealized profits
on land sold to Acdol
Separate realized incomes
Allocate Ben:
60% to Paik
10% to Acdol
Subtotal
Allocate Acdol to Paik
Consolidated net income

Paik
600,000

Acdol
360,000

Ben
340,000

60,000
(
660,000

360,000

100,000 )
240,000

144,000

(
24,000
(
384,000
$
307,200 )

144,000 )
24,000 )
72,000

804,000
307,200
$ 1,111,200

Noncontrolling interest
expense

$
(
$

76,800

72,000

LO1
Exercise 4
Separate incomes
Allocate Cabs income:
80% to Bacon
Subtotal
Allocate Bacons income:
95% to Abel
Subtotal
Allocate Abels income:
100 to Packer
Consolidated net income

Noncontrolling interest

Packer
$300,000

Abel
$100,000

Bacon
$200,000
240,000

418,000
518,000

Cab
$300,000
(240,000)

$440,000
(418,000)

518,000
(518,000)

$818,000

$0

$22,000

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$60,000

LO1
Exercise 5
Castle is not consolidated because the ownership percentage is less
than 20% and no evidence of control is given
Separate incomes
Allocate Baird 80%
Subtotal
Allocate Adam
Consolidated net
income

Paki
400,000

400,000
22,500

$
(

Adam
(50,000 )
80,000
30,000
22,500 )

422,500
$

7,500

Minority income

Noncontrolling interest in Baird

Noncontrolling interest in Adam
Noncontrolling interest expense

$
$

Baird
100,000
(80,000 )
20,000

20,000

$
$

20,000
7,500
27,500

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LO2
Exercise 6
Equations:
P = Income of Paco on a consolidated basis
A = Income of Aber on a consolidated basis
B = Income of Back on a consolidated basis
P = $100,000 + .90A
A = $ 40,000 + .85B
B = $ 55,000 + .05A
Computations:
A = $40,000 + (.85)x($55,000 + .05A)
A = $40,000 + $46,750 + .0425A
A = $90,601
B = $55,000 + (.05)x($90,601)
B = $59,530
P = $100,000 + (.9)x($90,601)
P = $100,000 + $81,541
P = $181,541
LO2
Exercise 7
Equations:
P = Income of Paine on a consolidated basis
A = Income of Achan on a consolidated basis
A = $160,000 + (.85) x ($220,000)
A = $160,000 + $187,000
A = $347,000
P = $400,000 + (90/95) x ($347,000)
P = $400,000 + $328,737
P = $728,737

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LO2
Exercise 8
Equations:
P = Income of Palace on a consolidated basis
A = Income of Acres on a consolidated basis
B = Income of Bain on a consolidated basis
P = $450,000 + .8A
A = $200,000 + .7B
B = $160,000 + .1A
Computations:
A
A
A
P
P
P

=
=
=
=
=
=

$200,000
$200,000
$335,484
$450,000
$450,000
$718,387

+ (.7)x($160,000 + .1A)
+ $112,000 + .07A
+ (.8)x($335,484)
+ $268,387

LO2
Exercise 9
Equations:
P = Income of Padhy on a consolidated basis
A = Income of Abrams on a consolidated basis
B = Income of Bacud on a consolidated basis
P = $300,000 + .8A
A = $100,000 + .6B
B = $ 80,000 + .1P
Computations:
P
P
P
P
P

=
=
=
=
=

$300,000
$300,000
$300,000
$380,000
$439,496

+
+
+
+

(.8)x($100,000 + .6B)
$80,000 + .48B
$80,000 + (.48)x($80,000 + .1P)
$38,400 + .048P

2009 Pearson Education, Inc. publishing as Prentice Hall

9-21

LO2
Exercise 10
Equations:
P = Income of Padua on a consolidated basis
A = Income of Able on a consolidated basis
A = $100,000 + (.6) x ($80,000)
A = $100,000 + $48,000
A = $148,000
P = $300,000 + (.8) x ($148,000)]
P = $300,000 + $118,400
P = $418,400

2009 Pearson Education, Inc. publishing as Prentice Hall

9-22