Answer:
D. $551,000
Explanation:
Since we need the accrual-based income of East Company -
Given,
West Company's net income = $860,000
East Company's net income = $600,000
Compass Company's income = $120,000
Intra-entity gain (Unrealized) = $96,000 (West), $70,000 (East), $15,000 (Compass)
Excess Amortization = $30,000 (West), $20,000 (East)
As East owns 60% of Compass Co., the Compass Income of East Co. share
= (Net income of Compass - Excess Amortization of East - Unrealized Gains (Intra-Entity) of Compass) x Percentage of share owned by East
= $(120,000 - 20,000 - 15,000) x 0.60
= $85,000 x 0.60
= $51,000
However, as West and East both use the initial value method to account for their investments, therefore, the net income of West share cannot be added -
Excess Amortization of West + Unrealized Gains (Intra-Entity) of West
= $(30,000 + 70,000) = $100,000
Total accrual-based income of East Co. = the Compass Income of East Co. share + The net income of East Company - West company's excess part
= $(51,000 + 600,000 - 100,000)
= $551,000
