Deck 6: Intercompany Inventory and Land Profits

Question 1

If a parent company borrows money at an interest rate of six percent from its subsidiary, what effect (if any) will this have on the non-controlling interest?

A) This would have no effect on the non-controlling interest.
B) The subsidiary would book its pro-rata share of any interest revenue.
C) The non-controlling interest balance would be reduced by the amount of the loan.
D) The subsidiary would record any interest revenue as an extraordinary gain.

Answer 1

A

Question 2

Under which of the following consolidation methods would the elimination of only the parent's share of any intercompany profits be required for the preparation of consolidated financial statements?

A) Parent company method
B) Fair value enterprise method
C) Proportionate consolidation method
D) Identifiable net asset method

Answer 2

C

Question 3

X Inc. owns 80% of Y Inc. During 2020, X Inc. sold inventory to Y for $10,000. Half of this inventory remained in Y's warehouse at year end.
Y Inc. sold inventory to X Inc. for $5,000. 40% of this inventory remained in X's warehouse at year end.
Both companies are subject to a tax rate of 40%. The gross profit percentage on sales is 20% for both companies. Unless otherwise stated, assume X Inc. uses the cost method to account for its investment in Y Inc.
What would be the journal entry to eliminate any unrealized profits from the consolidated financial statements during the year?

A)
$$\begin{array} { | l | r | r | } \hline & \text { Debit } & \text { Credit } \\\hline \text { Cost of Goods Sold } & \$ 1,400 & \\\hline \text { Inventory } & & \$ 1,400 \\\hline\end{array}$$
B)
$$\begin{array} { | l | r | r | } \hline & \text { Debit } & \text { Credit } \\\hline \text { Sales } & \$ 15,000 & \\\hline \text { Cost of Goods Sold } & & \$ 15,000 \\\hline\end{array}$$
C)
$$\begin{array} { | l | r | r | } \hline & \text { Debit } & \text { Credit } \\\hline \text { Sales } & \$ 15,000 & \\\hline \text { Cost of Goods Sold } & & \$ 12,000 \\\hline \text { Invertory } & & \$ 3,000 \\\hline\end{array}$$

Answer 3

$$\begin{array} { | l | r | r | } \hline & \text { Debit } & \text { Credit } \\\hline \text { Cost of Goods Sold } & \$ 1,400 & \\\hline \text { Inventory } & & \$ 1,400 \\\hline\end{array}$$

Question 4

Which of the following statements best describes the required accounting treatment with respect to income taxes on unrealized intercompany profits?

A) These taxes can be ignored since an increase in income tax expense for one company is offset by an equivalent reduction in income tax expense for the other.
B) They would be recognized as assets for the purchasing entity and liabilities for the selling entity.
C) The income tax will be expensed when the profit is realized in accordance with the matching principle.
D) They would be charged to retained earnings during the preparation of financial statements.

Question 5

X Inc. owns 80% of Y Inc. During 2020, X Inc. sold inventory to Y for $10,000. Half of this inventory remained in Y's warehouse at year end. Y Inc. sold inventory to X Inc. for $5,000. 40% of this inventory remained in X's warehouse at year end.
Both companies are subject to a tax rate of 40%. The gross profit percentage on sales is 20% for both companies. Unless otherwise stated, assume X Inc. uses the cost method to account for its investment in Y Inc.
Assuming that X Inc. used the equity method instead of the cost method, what adjustment would have to be made to the investment in Y account to adjust for any unrealized profits on Y's sales to X?

A) No adjustment would be required.
B) The account would have to be reduced by $240.
C) The account would have to be reduced by $192.
D) The account would have to be reduced by $48.Decrease in investment account = $192 = $240 unrealized after-tax profit  80% Controlling Interest ownership.

Question 6

X Inc. owns 80% of Y Inc. During 2020, X Inc. sold inventory to Y for $10,000. Half of this inventory remained in Y's warehouse at year end. Y Inc. sold inventory to X Inc. for $5,000. 40% of this inventory remained in X's warehouse at year end.
Both companies are subject to a tax rate of 40%. The gross profit percentage on sales is 20% for both companies. Unless otherwise stated, assume X Inc. uses the cost method to account for its investment in Y Inc.
What is the after-tax dollar value of X's realized profits during the year on its sales to Y?

A) $2,000
B) $1,000
C) $600
D) $400

Question 7

What effect will the rent of $10,000 charged by the Subsidiary to the Parent Company have on the calculation of the non-controlling interest in the net income of the Subsidiary? The Parent Company owns 80% of the Subsidiary.

A) The non-controlling interest will decrease by $10,000.
B) The non-controlling interest will decrease by $8,000.
C) There is no effect on the non-controlling interest.
D) The non-controlling interest will increase by $10,000.

Question 8

Kho Inc. purchased 90% of the voting shares of Lan Inc. for $600,000 on January 1, 2019. On that date, Lan's common shares and retained earnings were valued at $200,000 and $250,000 respectively. Unless otherwise stated, assume that Kho uses the cost method to account for its investment in Lan Inc. Lan's fair values approximated its carrying values with the following exceptions:
Lan's trademark had a fair value which was $50,000 higher than its carrying value.
Lan's bonds payable had a fair value which was $20,000 higher than their carrying value.
The trademark had a useful life of exactly ten years remaining from the date of acquisition. The bonds payable mature on January 1, 2029. Both companies use straight line amortization exclusively.
The financial statements of both companies for the year ended December 31, 2020 are shown below:
Income Statements
$\begin{array}{|l|r|r|}\hline & \text { Kho Inc. } & \text { Lan Inc. } \\\hline \text { Sales } & \$ 700,000 & \$ 640,000 \\\hline \text { Other Revenues } & \$ 300,000 & \$ 160,000 \\\hline \text { Less: Expenses: } & & \\\hline \text { Cost of Goods Sold } & \$ 280,000 & \$ 256,000 \\\hline \text { Depreciation Expense } & \$ 30,000 & \$ 14,000 \\\hline \text { Other Expenses } & \$ 240,000 & \$ 155,000 \\\hline \text { Income Tax Expense } & \$ 90,000 & \$ 75,000 \\\hline \text { Net Income } & \$ 360,000 & \$ 300,000 \\\hline\end{array}$ Retained Earnings Statements
$\begin{array}{|l|r|r|}\hline & \text { Kho Inc. } & \text { Lan Inc } \\\hline \text { Balance, January 1, 2020 } & \$ 200,000 & \$ 100,000 \\\hline \text { Net Income } & \$ 360,000 & \$ 300,000 \\\hline \text { Less: Dividends } & \$ \$ 60,000 & \$ \$ 50,000 \\\hline \text { Retained Earnings, Dec 31, 2020 } & \$ 5500,000 & \$ 350,000 \\\hline \text { Balance Sheets } & & \\\hline & \text { Kho Inc. } & \text { Lan Inc } \\\hline \text { Cash } & \$ 200,000 & \$ 150,000 \\\hline \text { Accounts Receivable } & \$ 50,000 & \$ 150,000 \\\hline \text { Inventory } & \$ 50,000 & \$ 150,000 \\\hline \text { Investment in Lan Inc. } & \$ 600,000 & \\\hline \text { Equipment (net) } & \$ 500,000 & \$ 150,000 \\\hline \text { Trademark } & & \$ 200,000 \\\hline \text { Total Assets } & \mathbf{\$ 1 , 4 0 0 , 0 0 0} & \mathbf{\$ 8 0 0 , 0 0 0} \\\hline \text { Current Liabilities } & \$ 280,000 & \$ 150,000 \\\hline \text { Bonds Payable } & \$ 120,000 & \$ 100,000 \\\hline \text { Common Shares } & \$ 500,000 & \$ 200,000 \\\hline \text { Retained Earnings } & \$ 500,000 & \$ 350,000 \\\hline \text { Total Liabilities and Equity } & \$ 1,400,000 & \$ 800,000 \\\hline\end{array}$ Since Kho acquired Lan, Kho has charged Lan an annual management fee of $30,000. Lan has paid Kho for the management services on December 31^st of each year.
What would be the amount of other revenue appearing on Kho Inc.'s consolidated income statement for the year ended December 31, 2020?

A) $385,000
B) $415,000
C) $388,000
D) $460,000

Question 9

Kho Inc. purchased 90% of the voting shares of Lan Inc. for $600,000 on January 1, 2019. On that date, Lan's common shares and retained earnings were valued at $200,000 and $250,000 respectively. Unless otherwise stated, assume that Kho uses the cost method to account for its investment in Lan Inc. Lan's fair values approximated its carrying values with the following exceptions:
Lan's trademark had a fair value which was $50,000 higher than its carrying value.
Lan's bonds payable had a fair value which was $20,000 higher than their carrying value.
The trademark had a useful life of exactly ten years remaining from the date of acquisition. The bonds payable mature on January 1, 2029. Both companies use straight line amortization exclusively.
The financial statements of both companies for the year ended December 31, 2020 are shown below:
Income Statements
$\begin{array}{|l|r|r|}\hline & \text { Kho Inc. } & \text { Lan Inc. } \\\hline \text { Sales } & \$ 700,000 & \$ 640,000 \\\hline \text { Other Revenues } & \$ 300,000 & \$ 160,000 \\\hline \text { Less: Expenses: } & & \\\hline \text { Cost of Goods Sold } & \$ 280,000 & \$ 256,000 \\\hline \text { Depreciation Expense } & \$ 30,000 & \$ 14,000 \\\hline \text { Other Expenses } & \$ 240,000 & \$ 155,000 \\\hline \text { Income Tax Expense } & \$ 90,000 & \$ 75,000 \\\hline \text { Net Income } & \$ 360,000 & \$ 300,000 \\\hline\end{array}$ Retained Earnings Statements
$\begin{array}{|l|r|r|}\hline & \text { Kho Inc. } & \text { Lan Inc } \\\hline \text { Balance, January 1, 2020 } & \$ 200,000 & \$ 100,000 \\\hline \text { Net Income } & \$ 360,000 & \$ 300,000 \\\hline \text { Less: Dividends } & \$ \$ 60,000 & \$ \$ 50,000 \\\hline \text { Retained Earnings, Dec 31, 2020 } & \$ 5500,000 & \$ 350,000 \\\hline \text { Balance Sheets } & & \\\hline & \text { Kho Inc. } & \text { Lan Inc } \\\hline \text { Cash } & \$ 200,000 & \$ 150,000 \\\hline \text { Accounts Receivable } & \$ 50,000 & \$ 150,000 \\\hline \text { Inventory } & \$ 50,000 & \$ 150,000 \\\hline \text { Investment in Lan Inc. } & \$ 600,000 & \\\hline \text { Equipment (net) } & \$ 500,000 & \$ 150,000 \\\hline \text { Trademark } & & \$ 200,000 \\\hline \text { Total Assets } & \mathbf{\$ 1 , 4 0 0 , 0 0 0} & \mathbf{\$ 8 0 0 , 0 0 0} \\\hline \text { Current Liabilities } & \$ 280,000 & \$ 150,000 \\\hline \text { Bonds Payable } & \$ 120,000 & \$ 100,000 \\\hline \text { Common Shares } & \$ 500,000 & \$ 200,000 \\\hline \text { Retained Earnings } & \$ 500,000 & \$ 350,000 \\\hline \text { Total Liabilities and Equity } & \$ 1,400,000 & \$ 800,000 \\\hline\end{array}$ Other Information:
A goodwill impairment test conducted during August 2020 revealed that the Lan's Goodwill amount on the date of acquisition had been impaired by $10,000.
During 2019, Kho sold $50,000 worth of inventory to Lan, half of which was sold to outsiders during the year. During 2020, Kho sold inventory to Lan for $90,000. Two-thirds of this inventory was resold by Lan to outside parties.
During 2019, Lan sold $30,000 worth of inventory to Kho, 80% of which was sold to outsiders during the year. During 2020, Lan sold inventory to Kho for $40,000. 75% of this inventory was resold by Kho to outside parties. As of December 31, 2020, Kho still owes $20,000 to Lan for the inventory.
All intercompany sales as well as sales to outsiders earn a gross margin on sales of 20%. The effective tax rate for both companies is 20%.
Since Kho acquired Lan, Kho has charged Lan an annual management fee of $30,000. Lan has paid Kho for the management services on December 31^st of each year.
What amount of sales revenue would appear on Kho Inc.'s consolidated income statement for the year ended December 31, 2020?

A) $1,210,000
B) $1,276,000
C) $1,340,000
D) $1,400,000

Question 10

X Inc. owns 80% of Y Inc. During 2020, X Inc. sold inventory to Y for $10,000. Half of this inventory remained in Y's warehouse at year end. Y Inc. sold inventory to X Inc. for $5,000. 40% of this inventory remained in X's warehouse at year end.
Both companies are subject to a tax rate of 40%. The gross profit percentage on sales is 20% for both companies. Unless otherwise stated, assume X Inc. uses the cost method to account for its investment in Y Inc.
What is the after-tax dollar value of Y's realized profits during the year on its sales to X?

A) $240
B) $360
C) $400
D) $500

Question 11

Intercompany profits on sales of inventory are only realized:

A) once the seller receives payment for the sale.
B) once the inventory has been sold to outsiders.
C) when the inventory has been received by the purchaser.
D) when the inventory has been shipped to the purchaser.

Question 12

How would any management fees charged by a Parent Company to its Subsidiary be accounted for during the consolidation process?

A) The Parent Company would only record its pro rata share of any management revenues.
B) The Parent Company's profit on the rendering of management services would be charged to retained earnings.
C) Both the Parent's management fees and the subsidiary's related expense would be eliminated when preparing Consolidated Financial Statements.
D) No special accounting treatment is required, since this would have no effect on Consolidated Net Income.

Question 13

Kho Inc. purchased 90% of the voting shares of Lan Inc. for $600,000 on January 1, 2019. On that date, Lan's common shares and retained earnings were valued at $200,000 and $250,000 respectively. Unless otherwise stated, assume that Kho uses the cost method to account for its investment in Lan Inc. Lan's fair values approximated its carrying values with the following exceptions:
Lan's trademark had a fair value which was $50,000 higher than its carrying value.
Lan's bonds payable had a fair value which was $20,000 higher than their carrying value.
The trademark had a useful life of exactly ten years remaining from the date of acquisition. The bonds payable mature on January 1, 2029. Both companies use straight line amortization exclusively.
The financial statements of both companies for the year ended December 31, 2020 are shown below:
Income Statements
$\begin{array}{|l|r|r|}\hline & \text { Kho Inc. } & \text { Lan Inc. } \\\hline \text { Sales } & \$ 700,000 & \$ 640,000 \\\hline \text { Other Revenues } & \$ 300,000 & \$ 160,000 \\\hline \text { Less: Expenses: } & & \\\hline \text { Cost of Goods Sold } & \$ 280,000 & \$ 256,000 \\\hline \text { Depreciation Expense } & \$ 30,000 & \$ 14,000 \\\hline \text { Other Expenses } & \$ 240,000 & \$ 155,000 \\\hline \text { Income Tax Expense } & \$ 90,000 & \$ 75,000 \\\hline \text { Net Income } & \$ 360,000 & \$ 300,000 \\\hline\end{array}$ Retained Earnings Statements
$\begin{array}{|l|r|r|} \hline& \text { Kho Inc. } & \text { Lan Inc. } \\\hline \text { Balance, January 1, 2020 } & \$ 200,000 & \$ 100,000 \\\hline \text { Net Income } & \$ 360,000 & \$ 300,000 \\\hline \text { Less: Dividends } & (\$ 60,000) & (\$ 50,000) \\\hline \text { Retained Earnings, Dec 31, 2020 } & \mathbf{\$ 5 0 0 , 0 0 0} & \underline{\$ 350,000} \\\hline \text { Balance Sheets } & & \\\hline & \text { Kho Inc. } & \text { Lan Inc. } \\\hline \text { Cash } & \$ 200,000 & \$ 150,000 \\\hline \text { Accounts Receivable } & \$ 50,000 & \$ 150,000 \\\hline \text { Inventory } & \$ 50,000 & \$ 150,000 \\\hline \text { Investment in Lan Inc. } & \$ 600,000 & \\\hline \text { Equipment (net) } & \$ 500,000 & \$ 150,000 \\\hline \text { Trademark } & & \$ 200,000 \\\hline \text { Total Assets } & \$ 1,400,000 & \$ 800,000 \\\hline \text { Current Liabilities } & \$ 280,000 & \$ 150,000 \\\hline \text { Bonds Payable } & \$ 120,000 & \$ 100,000 \\\hline \text { Common Shares } & \$ 500,000 & \$ 200,000 \\\hline \text { Retained Earnings } & \$ 500,000 & \$ 350,000 \\\hline \text { Total Liabilities and Equity } & \$ 1,400,000 & \$ 800,000 \\\hline\end{array}$ Other Information:
A goodwill impairment test conducted during August 2020 revealed that the Lan's Goodwill amount on the date of acquisition had been impaired by $10,000.
During 2019, Kho sold $50,000 worth of inventory to Lan, half of which was sold to outsiders during the year. During 2020, Kho sold inventory to Lan for $90,000. Two-thirds of this inventory was resold by Lan to outside parties.
During 2019, Lan sold $30,000 worth of inventory to Kho, 80% of which was sold to outsiders during the year. During 2020, Lan sold inventory to Kho for $40,000. 75% of this inventory was resold by Kho to outside parties. As of December 31, 2020, Kho still owes $20,000 to Lan for the inventory.
All intercompany sales as well as sales to outsiders earn a gross margin on sales of 20%. The effective tax rate for both companies is 20%.
Since Kho acquired Lan, Kho has charged Lan an annual management fee of $30,000. Lan has paid Kho for the management services on December 31^st of each year.
What is the amount of goodwill arising from this business combination on acquisition date?

A) $(180,000)
B) $120,000
C) $168,000
D) $186,667

Question 14

X Inc. owns 80% of Y Inc. During 2020, X Inc. sold inventory to Y for $10,000. Half of this inventory remained in Y's warehouse at year end. Y Inc. sold inventory to X Inc. for $5,000. 40% of this inventory remained in X's warehouse at year end.
Both companies are subject to a tax rate of 40%. The gross profit percentage on sales is 20% for both companies. Unless otherwise stated, assume X Inc. uses the cost method to account for its investment in Y Inc.
What is the after-tax dollar value of Y's unrealized profits during the year on its sales to X?

A) $240
B) $360
C) $400
D) $500

Question 15

X Inc. owns 80% of Y Inc. During 2020, X Inc. sold inventory to Y for $10,000. Half of this inventory remained in Y's warehouse at year end. Y Inc. sold Inventory to X Inc. for $5,000. 40% of this inventory remained in X's warehouse at year end.
Both companies are subject to a tax rate of 40%. The gross profit percentage on sales is 20% for both companies. Unless otherwise stated, assume X Inc. uses the cost method to account for its Investment in Y Inc.
Assume that Y Inc. reported an after-tax net income of $20,000 in 2020, what would be Y's adjusted net income for the year?

A) $202,400
B) $20,000
C) $19,840
D) $19,760

Question 16

Which of the following methods does NOT call for the elimination of ALL intercompany profits?

A) Identifiable net asset method
B) Fair value enterprise method
C) Proportionate consolidation method
D) Partial goodwill method

Question 17

X Inc. owns 80% of Y Inc. During 2020, X Inc. sold inventory to Y for $10,000. Half of this inventory remained in Y's warehouse at year end. Y Inc. sold inventory to X Inc. for $5,000. 40% of this inventory remained in X's warehouse at year end.
Both companies are subject to a tax rate of 40%. The gross profit percentage on sales is 20% for both companies. Unless otherwise stated, assume X Inc. uses the cost method to account for its investment in Y Inc.
What is the after-tax dollar value of X's unrealized profits during the year on its sales to Y?

A) $2,000
B) $1,000
C) $600
D) $400

Question 18

Kho Inc. purchased 90% of the voting shares of Lan Inc. for $600,000 on January 1, 2019. On that date, Lan's common shares and retained earnings were valued at $200,000 and $250,000 respectively. Unless otherwise stated, assume that Kho uses the cost method to account for its investment in Lan Inc.
Lan's fair values approximated its carrying values with the following exceptions:
Lan's trademark had a fair value which was $50,000 higher than its carrying value.
Lan's bonds payable had a fair value which was $20,000 higher than their carrying value.
The trademark had a useful life of exactly ten years remaining from the date of acquisition. The bonds payable mature on January 1, 2029. Both companies use straight line amortization exclusively.
The financial statements of both companies for the year ended December 31, 2020 are shown below:
Income Statements
Retained Earnings Statements
Other Information:
A goodwill impairment test conducted during August 2020 revealed that the Lan's Goodwill amount on the date of acquisition had been impaired by $10,000.
During 2019, Kho sold $50,000 worth of inventory to Lan, half of which was sold to outsiders during the year. During 2020, Kho sold inventory to Lan for $90,000. Two-thirds of this inventory was resold by Lan to outside parties.
During 2019, Lan sold $30,000 worth of inventory to Kho, 80% of which was sold to outsiders during the year. During 2020, Lan sold inventory to Kho for $40,000. 75% of this inventory was resold by Kho to outside parties. As of December 31, 2020, Kho still owes $20,000 to Lan for the inventory.
All intercompany sales as well as sales to outsiders earn a gross margin on sales of 20%. The effective tax rate for both companies is 20%.
Since Kho acquired Lan, Kho has charged Lan an annual management fee of $30,000. Lan has paid Kho for the management services on December 31^st of each year.
What would be the journal entry to record the dividends received by Kho Inc. during 2020?
A.

B.

C.

D.

Question 19

X Inc. owns 80% of Y Inc. During 2020, X Inc. sold inventory to Y for $10,000. Half of this inventory remained in Y's warehouse at year end. Y Inc. sold inventory to X Inc. for $5,000. 40% of this inventory remained in X's warehouse at year end.
Both companies are subject to a tax rate of 40%. The gross profit percentage on sales is 20% for both companies. Unless otherwise stated, assume X Inc. uses the cost method to account for its investment in Y Inc.
What effect (if any) would Y's unrealized profits on its sales to X have on the non-controlling interest account on the consolidated balance sheet?

A) There would be no effect.
B) There would be an increase to the non-controlling interest account for the amount of $72.
C) There would be a decrease to the non-controlling interest account for the amount of $48.
D) There would be an increase to the non-controlling interest account for the amount of $48.Decrease in NCI account = $48 = $240 unrealized after-tax profit  20% NCI ownership.

Question 20

When are profits from intercompany land sales realized?

A) They are realized only when sold to outsiders.
B) They are realized once legal ownership of the land has been transferred.
C) They are realized when consideration has been received for the land.
D) They are realized when an agreement is signed with respect to ownership of the land.

Question 21

Kho Inc. purchased 90% of the voting shares of Lan Inc. for $600,000 on January 1, 2019. On that date, Lan's common shares and retained earnings were valued at $200,000 and $250,000 respectively. Unless otherwise stated, assume that Kho uses the cost method to account for its investment in Lan Inc. Lan's fair values approximated its carrying values with the following exceptions:
Lan's trademark had a fair value which was $50,000 higher than its carrying value.
Lan's bonds payable had a fair value which was $20,000 higher than their carrying value.
The trademark had a useful life of exactly ten years remaining from the date of acquisition. The bonds payable mature on January 1, 2029. Both companies use straight line amortization exclusively.
The financial statements of both companies for the year ended December 31, 2020 are shown below:
Income Statements
$$\begin{array} { | l | r | r | } \hline & \text { Kho Inc. } & \text { Lan Inc. } \\\hline \text { Sales } & \$ 700,000 & \$ 640,000 \\\hline \text { Other Revenues } & \$ 300,000 & \$ 160,000 \\\hline \text { Less: Expenses: } & & \\\hline \text { Cost of Goods Sold } & \$ 280,000 & \$ 256,000 \\\hline \text { Depreciation Expense } & \$ 30,000 & \$ 14,000 \\\hline \text { Other Expenses } & \$ 240,000 & \$ 155,000 \\\hline \text { Income Tax Expense } & \$ 90,000 & \$ 75,000 \\\hline \text { Net Income } & \$ 360,000 & \$ 300,000 \\\hline\end{array}$$ Retained Earnings Statements
$\begin{array}{|l|r|r|}\hline & \text { Kho Inc. } & \text { Lan Inc } \\\hline \text { Balance, January 1, 2020 } & \$ 200,000 & \$ 100,000 \\\hline \text { Net Income } & \$ 360,000 & \$ 300,000 \\\hline \text { Less: Dividends } & \$ \$ 60,000 & \$ \$ 50,000 \\\hline \text { Retained Earnings, Dec 31, 2020 } & \$ 5500,000 & \$ 350,000 \\\hline \text { Balance Sheets } & & \\\hline & \text { Kho Inc. } & \text { Lan Inc } \\\hline \text { Cash } & \$ 200,000 & \$ 150,000 \\\hline \text { Accounts Receivable } & \$ 50,000 & \$ 150,000 \\\hline \text { Inventory } & \$ 50,000 & \$ 150,000 \\\hline \text { Investment in Lan Inc. } & \$ 600,000 & \\\hline \text { Equipment (net) } & \$ 500,000 & \$ 150,000 \\\hline \text { Trademark } & & \$ 200,000 \\\hline \text { Total Assets } & \mathbf{\$ 1 , 4 0 0 , 0 0 0} & \mathbf{\$ 8 0 0 , 0 0 0} \\\hline \text { Current Liabilities } & \$ 280,000 & \$ 150,000 \\\hline \text { Bonds Payable } & \$ 120,000 & \$ 100,000 \\\hline \text { Common Shares } & \$ 500,000 & \$ 200,000 \\\hline \text { Retained Earnings } & \$ 500,000 & \$ 350,000 \\\hline \text { Total Liabilities and Equity } & \$ 1,400,000 & \$ 800,000 \\\hline\end{array}$ Other Information:
A goodwill impairment test conducted during August 2020 revealed that the Lan's Goodwill amount on the date of acquisition had been impaired by $10,000.
During 2019, Kho sold $50,000 worth of inventory to Lan, half of which was sold to outsiders during the year. During 2020, Kho sold inventory to Lan for $90,000. Two-thirds of this inventory was resold by Lan to outside parties.
During 2019, Lan sold $30,000 worth of inventory to Kho, 80% of which was sold to outsiders during the year. During 2020, Lan sold inventory to Kho for $40,000. 75% of this inventory was resold by Kho to outside parties. As of December 31, 2020, Kho still owes $20,000 to Lan for the inventory.
All intercompany sales as well as sales to outsiders earn a gross margin on sales of 20%. The effective tax rate for both companies is 20%.
Since Kho acquired Lan, Kho has charged Lan an annual management fee of $30,000. Lan has paid Kho for the management services on December 31^st of each year.
How are changes to the acquisition differential reflected on Kho's 2020 consolidated income statement?

A) It would be reflected through non-controlling interest in earnings.
B) It would be reflected through other expenses.
C) It would be reflected through cost of sales.
D) It would be reflected as a reduction of sales.

Question 22

LEO Inc. acquired a 60% interest in MARS Inc. on January 1, 2019 for $400,000. Unless otherwise stated, LEO uses the cost method to account for its investment in MARS Inc. On the acquisition date, MARS had common stock and retained earnings valued at $100,000 and $150,000 respectively. The acquisition differential was allocated as follows: $80,000 to undervalued inventory.
$40,000 to undervalued equipment. (to be amortized over 20 years)
The following took place during 2019:
▪ MARS reported a net income and declared dividends of $25,000 and $5,000 respectively.
▪ LEO's December 31, 2019 inventory contained an intercompany profit of $10,000.
▪ LEO's net income was $75,000.
The following took place during 2020:
▪ MARS reported a net income and declared dividends of $36,000 and $6,000 respectively.
▪ MARS' December 31, 2020 inventory contained an intercompany profit of $5,000.
▪ LEO's net income was $48,000.
Both companies are subject to a 25% tax rate. All intercompany sales as well as sales to outsiders are priced to provide the selling company with gross margin of 20%.
Consolidated net income attributable to the shareholders of the parent for 2019 would be:

A) $12,500.
B) $33,300.
C) $36,300.
D) $53,200.

Question 23

LEO Inc. acquired a 60% interest in MARS Inc. on January 1, 2019 for $400,000. Unless otherwise stated, LEO uses the cost method to account for its investment in MARS Inc. On the acquisition date, MARS had common stock and retained earnings valued at $100,000 and $150,000 respectively. The acquisition differential was allocated as follows: $80,000 to undervalued inventory.
$40,000 to undervalued equipment. (to be amortized over 20 years)
The following took place during 2019:
▪ MARS reported a net income and declared dividends of $25,000 and $5,000 respectively.
▪ LEO's December 31, 2019 inventory contained an intercompany profit of $10,000.
▪ LEO's net income was $75,000.
The following took place during 2020:
▪ MARS reported a net income and declared diviends of $36,000 and $6,000 respectively.
▪ MARS' December 31, 2020 inventory contained an intercompany profit of $5,000.
▪ LEO's net income was $48,000.
Both companies are subject to a 25% tax rate. All intercompany sales as well as sales to outsiders are priced to provide the selling company with gross margin of 20%.
What would be the change in the non-controlling interest account for 2020?

A) Non-controlling interest would increase by $14,200.
B) Non-controlling interest would increase by $16,800.
C) Non-controlling interest would decrease by $45,000.
D) Non-controlling interest would increase by $48,000.

Question 24

Kho Inc. purchased 90% of the voting shares of Lan Inc. for $600,000 on January 1, 2019. On that date, Lan's common shares and retained earnings were valued at $200,000 and $250,000 respectively. Unless otherwise stated, assume that Kho uses the cost method to account for its investment in Lan Inc. Lan's fair values approximated its carrying values with the following exceptions:
Lan's trademark had a fair value which was $50,000 higher than its carrying value.
Lan's bonds payable had a fair value which was $20,000 higher than their carrying value.
The trademark had a useful life of exactly ten years remaining from the date of acquisition. The bonds payable mature on January 1, 2029. Both companies use straight line amortization exclusively.
The financial statements of both companies for the year ended December 31, 2020 are shown below:
Income Statements
$\begin{array}{|l|r|r|}\hline & \text { Kho Inc. } & \text { Lan Inc. } \\\hline \text { Sales } & \$ 700,000 & \$ 640,000 \\\hline \text { Other Revenues } & \$ 300,000 & \$ 160,000 \\\hline \text { Less: Expenses: } & & \\\hline \text { Cost of Goods Sold } & \$ 280,000 & \$ 256,000 \\\hline \text { Depreciation Expense } & \$ 30,000 & \$ 14,000 \\\hline \text { Other Expenses } & \$ 240,000 & \$ 155,000 \\\hline \text { Income Tax Expense } & \$ 90,000 & \$ 75,000 \\\hline \text { Net Income } & \$ 360,000 & \$ 300,000 \\\hline\end{array}$ Retained Earnings Statements
$\begin{array}{|l|r|r|}\hline & \text { Kho Inc. } & \text { Lan Inc } \\\hline \text { Balance, January 1, 2020 } & \$ 200,000 & \$ 100,000 \\\hline \text { Net Income } & \$ 360,000 & \$ 300,000 \\\hline \text { Less: Dividends } & \$ \$ 60,000 & \$ \$ 50,000 \\\hline \text { Retained Earnings, Dec 31, 2020 } & \$ 5500,000 & \$ 350,000 \\\hline \text { Balance Sheets } & & \\\hline & \text { Kho Inc. } & \text { Lan Inc } \\\hline \text { Cash } & \$ 200,000 & \$ 150,000 \\\hline \text { Accounts Receivable } & \$ 50,000 & \$ 150,000 \\\hline \text { Inventory } & \$ 50,000 & \$ 150,000 \\\hline \text { Investment in Lan Inc. } & \$ 600,000 & \\\hline \text { Equipment (net) } & \$ 500,000 & \$ 150,000 \\\hline \text { Trademark } & & \$ 200,000 \\\hline \text { Total Assets } & \mathbf{\$ 1 , 4 0 0 , 0 0 0} & \mathbf{\$ 8 0 0 , 0 0 0} \\\hline \text { Current Liabilities } & \$ 280,000 & \$ 150,000 \\\hline \text { Bonds Payable } & \$ 120,000 & \$ 100,000 \\\hline \text { Common Shares } & \$ 500,000 & \$ 200,000 \\\hline \text { Retained Earnings } & \$ 500,000 & \$ 350,000 \\\hline \text { Total Liabilities and Equity } & \$ 1,400,000 & \$ 800,000 \\\hline\end{array}$ Other Information:
A goodwill impairment test conducted during August 2020 revealed that the Lan's Goodwill amount on the date of acquisition had been impaired by $10,000.
During 2019, Kho sold $50,000 worth of inventory to Lan, half of which was sold to outsiders during the year. During 2020, Kho sold inventory to Lan for $90,000. Two-thirds of this inventory was resold by Lan to outside parties.
During 2019, Lan sold $30,000 worth of inventory to Kho, 80% of which was sold to outsiders during the year. During 2020, Lan sold inventory to Kho for $40,000. 75% of this inventory was resold by Kho to outside parties. As of December 31, 2020, Kho still owes $20,000 to Lan for the inventory.
All intercompany sales as well as sales to outsiders earn a gross margin on sales of 20%. The effective tax rate for both companies is 20%.
Since Kho acquired Lan, Kho has charged Lan an annual management fee of $30,000. Lan has paid Kho for the management services on December 31^st of each year.
Ignoring taxes, what is the total amount of unrealized profits in inventory at the start of 2020?

A) Nil
B) $5,000
C) $6,000
D) $6,200

Question 25

LEO Inc. acquired a 60% interest in MARS Inc. on January 1, 2019 for $400,000. Unless otherwise stated, LEO uses the cost method to account for its investment in MARS Inc. On the acquisition date, MARS had common stock and retained earnings valued at $100,000 and $150,000 respectively. The acquisition differential was allocated as follows: $80,000 to undervalued inventory.
$40,000 to undervalued equipment. (to be amortized over 20 years)
The following took place during 2019:
▪ MARS reported a net income and declared dividends of $25,000 and $5,000 respectively.
▪ LEO's December 31, 2019 inventory contained an intercompany profit of $10,000.
▪ LEO's net income was $75,000.
The following took place during 2020:
▪ MARS reported a net income and declared dividends of $36,000 and $6,000 respectively.
▪ MARS' December 31, 2020 inventory contained an intercompany profit of $5,000.
▪ LEO's net income was $48,000.
Both companies are subject to a 25% tax rate. All intercompany sales as well as sales to outsiders are priced to provide the selling company with gross margin of 20%.
What would be the balance in the investment in MARS account at December 31, 2019?

A) $318,000
B) $330,000
C) $358,300
D) $400,000

Question 26

Kho Inc. purchased 90% of the voting shares of Lan Inc. for $600,000 on January 1, 2019. On that date, Lan's common shares and retained earnings were valued at $200,000 and $250,000 respectively. Unless otherwise stated, assume that Kho uses the cost method to account for its investment in Lan Inc. Lan's fair values approximated its carrying values with the following exceptions:
Lan's trademark had a fair value which was $50,000 higher than its carrying value.
Lan's bonds payable had a fair value which was $20,000 higher than their carrying value.
The trademark had a useful life of exactly ten years remaining from the date of acquisition. The bonds payable mature on January 1, 2029. Both companies use straight line amortization exclusively.
The financial statements of both companies for the year ended December 31, 2020 are shown below:
Income Statements
$$\begin{array} { | l | r | r | } \hline & \text { Kho Inc. } & \text { Lan Inc. } \\\hline \text { Sales } & \$ 700,000 & \$ 640,000 \\\hline \text { Other Revenues } & \$ 300,000 & \$ 160,000 \\\hline \text { Less: Expenses: } & & \\\hline \text { Cost of Goods Sold } & \$ 280,000 & \$ 256,000 \\\hline \text { Depreciation Expense } & \$ 30,000 & \$ 14,000 \\\hline \text { Other Expenses } & \$ 240,000 & \$ 155,000 \\\hline \text { Income Tax Expense } & \$ 90,000 & \$ 75,000 \\\hline \text { Net Income } & \$ 360,000 & \$ 300,000 \\\hline\end{array}$$ Retained Earnings Statements
$\begin{array}{|l|r|r|}\hline & \text { Kho Inc. } & \text { Lan Inc } \\\hline \text { Balance, January 1, 2020 } & \$ 200,000 & \$ 100,000 \\\hline \text { Net Income } & \$ 360,000 & \$ 300,000 \\\hline \text { Less: Dividends } & \$ \$ 60,000 & \$ \$ 50,000 \\\hline \text { Retained Earnings, Dec 31, 2020 } & \$ 5500,000 & \$ 350,000 \\\hline \text { Balance Sheets } & & \\\hline & \text { Kho Inc. } & \text { Lan Inc } \\\hline \text { Cash } & \$ 200,000 & \$ 150,000 \\\hline \text { Accounts Receivable } & \$ 50,000 & \$ 150,000 \\\hline \text { Inventory } & \$ 50,000 & \$ 150,000 \\\hline \text { Investment in Lan Inc. } & \$ 600,000 & \\\hline \text { Equipment (net) } & \$ 500,000 & \$ 150,000 \\\hline \text { Trademark } & & \$ 200,000 \\\hline \text { Total Assets } & \mathbf{\$ 1 , 4 0 0 , 0 0 0} & \mathbf{\$ 8 0 0 , 0 0 0} \\\hline \text { Current Liabilities } & \$ 280,000 & \$ 150,000 \\\hline \text { Bonds Payable } & \$ 120,000 & \$ 100,000 \\\hline \text { Common Shares } & \$ 500,000 & \$ 200,000 \\\hline \text { Retained Earnings } & \$ 500,000 & \$ 350,000 \\\hline \text { Total Liabilities and Equity } & \$ 1,400,000 & \$ 800,000 \\\hline\end{array}$ Other Information:
A goodwill impairment test conducted during August 2020 revealed that the Lan's Goodwill amount on the date of acquisition had been impaired by $10,000.
During 2019, Kho sold $50,000 worth of inventory to Lan, half of which was sold to outsiders during the year. During 2020, Kho sold inventory to Lan for $90,000. Two-thirds of this inventory was resold by Lan to outside parties.
During 2019, Lan sold $30,000 worth of inventory to Kho, 80% of which was sold to outsiders during the year. During 2020, Lan sold inventory to Kho for $40,000. 75% of this inventory was resold by Kho to outside parties. As of December 31, 2020, Kho still owes $20,000 to Lan for the inventory.
All intercompany sales as well as sales to outsiders earn a gross margin on sales of 20%. The effective tax rate for both companies is 20%.
Since Kho acquired Lan, Kho has charged Lan an annual management fee of $30,000. Lan has paid Kho for the management services on December 31^st of each year.
What would be the amount appearing on the December 31, 2020 consolidated statement of financial position for current liabilities?

A) $430,000
B) $450,000
C) $410,000
D) $412,000

Question 27

LEO Inc. acquired a 60% interest in MARS Inc. on January 1, 2019 for $400,000. Unless otherwise stated, LEO uses the cost method to account for its investment in MARS Inc. On the acquisition date, MARS had common stock and retained earnings valued at $100,000 and $150,000 respectively. The acquisition differential was allocated as follows: $80,000 to undervalued inventory.
$40,000 to undervalued equipment. (to be amortized over 20 years)
The following took place during 2019:
▪ MARS reported a net income and declared dividends of $25,000 and $5,000 respectively.
▪ LEO's December 31, 2019 inventory contained an intercompany profit of $10,000.
▪ LEO's net income was $75,000.
The following took place during 2020:
▪ MARS reported a net income and declared dividends of $36,000 and $6,000 respectively.
▪ MARS' December 31, 2020 inventory contained an intercompany profit of $5,000.
▪ LEO's net income was $48,000.
Both companies are subject to a 25% tax rate. All intercompany sales as well as sales to outsiders are priced to provide the selling company with gross margin of 20%.
What would be the amount of changes to the acquisition differential during 2020?

A) $2,000
B) $40,000
C) $78,000
D) $82,000

Question 28

Kho Inc. purchased 90% of the voting shares of Lan Inc. for $600,000 on January 1, 2019. On that date, Lan's common shares and retained earnings were valued at $200,000 and $250,000 respectively. Unless otherwise stated, assume that Kho uses the cost method to account for its investment in Lan Inc. Lan's fair values approximated its carrying values with the following exceptions:
Lan's trademark had a fair value which was $50,000 higher than its carrying value.
Lan's bonds payable had a fair value which was $20,000 higher than their carrying value.
The trademark had a useful life of exactly ten years remaining from the date of acquisition. The bonds payable mature on January 1, 2029. Both companies use straight line amortization exclusively.
The financial statements of both companies for the year ended December 31, 2020 are shown below:
Income Statements
$$\begin{array} { | l | r | r | } \hline & \text { Kho Inc. } & \text { Lan Inc. } \\\hline \text { Sales } & \$ 700,000 & \$ 640,000 \\\hline \text { Other Revenues } & \$ 300,000 & \$ 160,000 \\\hline \text { Less: Expenses: } & & \\\hline \text { Cost of Goods Sold } & \$ 280,000 & \$ 256,000 \\\hline \text { Depreciation Expense } & \$ 30,000 & \$ 14,000 \\\hline \text { Other Expenses } & \$ 240,000 & \$ 155,000 \\\hline \text { Income Tax Expense } & \$ 90,000 & \$ 75,000 \\\hline \text { Net Income } & \$ 360,000 & \$ 300,000 \\\hline\end{array}$$ Retained Earnings Statements
$\begin{array}{|l|r|r|}\hline & \text { Kho Inc. } & \text { Lan Inc } \\\hline \text { Balance, January 1, 2020 } & \$ 200,000 & \$ 100,000 \\\hline \text { Net Income } & \$ 360,000 & \$ 300,000 \\\hline \text { Less: Dividends } & \$ \$ 60,000 & \$ \$ 50,000 \\\hline \text { Retained Earnings, Dec 31, 2020 } & \$ 5500,000 & \$ 350,000 \\\hline \text { Balance Sheets } & & \\\hline & \text { Kho Inc. } & \text { Lan Inc } \\\hline \text { Cash } & \$ 200,000 & \$ 150,000 \\\hline \text { Accounts Receivable } & \$ 50,000 & \$ 150,000 \\\hline \text { Inventory } & \$ 50,000 & \$ 150,000 \\\hline \text { Investment in Lan Inc. } & \$ 600,000 & \\\hline \text { Equipment (net) } & \$ 500,000 & \$ 150,000 \\\hline \text { Trademark } & & \$ 200,000 \\\hline \text { Total Assets } & \mathbf{\$ 1 , 4 0 0 , 0 0 0} & \mathbf{\$ 8 0 0 , 0 0 0} \\\hline \text { Current Liabilities } & \$ 280,000 & \$ 150,000 \\\hline \text { Bonds Payable } & \$ 120,000 & \$ 100,000 \\\hline \text { Common Shares } & \$ 500,000 & \$ 200,000 \\\hline \text { Retained Earnings } & \$ 500,000 & \$ 350,000 \\\hline \text { Total Liabilities and Equity } & \$ 1,400,000 & \$ 800,000 \\\hline\end{array}$ Other Information:
A goodwill impairment test conducted during August 2020 revealed that the Lan's Goodwill amount on the date of acquisition had been impaired by $10,000.
During 2019, Kho sold $50,000 worth of inventory to Lan, half of which was sold to outsiders during the year. During 2020, Kho sold inventory to Lan for $90,000. Two-thirds of this inventory was resold by Lan to outside parties.
During 2019, Lan sold $30,000 worth of inventory to Kho, 80% of which was sold to outsiders during the year. During 2020, Lan sold inventory to Kho for $40,000. 75% of this inventory was resold by Kho to outside parties. As of December 31, 2020, Kho still owes $20,000 to Lan for the inventory.
All intercompany sales as well as sales to outsiders earn a gross margin on sales of 20%. The effective tax rate for both companies is 20%.
Since Kho acquired Lan, Kho has charged Lan an annual management fee of $30,000. Lan has paid Kho for the management services on December 31^st of each year.
What would be the non-controlling interest amount appearing on Kho's consolidated statement of financial position at the end of 2020?

A) $29,936
B) $55,840
C) $57,400
D) $74,907

Question 29

LEO Inc. acquired a 60% interest in MARS Inc. on January 1, 2019 for $400,000. Unless otherwise stated, LEO uses the cost method to account for its investment in MARS Inc. On the acquisition date, MARS had common stock and retained earnings valued at $100,000 and $150,000 respectively. The acquisition differential was allocated as follows: $80,000 to undervalued inventory.
$40,000 to undervalued equipment. (to be amortized over 20 years)
The following took place during 2019:
▪ MARS reported a net income and declared dividends of $25,000 and $5,000 respectively.
▪ LEO's December 31, 2019 inventory contained an intercompany profit of $10,000.
▪ LEO's net income was $75,000.
The following took place during 2020:
▪ MARS reported a net income and declared dividends of $36,000 and $6,000 respectively.
▪ MARS' December 31, 2020 inventory contained an intercompany profit of $5,000.
▪ LEO's net income was $48,000.
Both companies are subject to a 25% tax rate. All intercompany sales as well as sales to outsiders are priced to provide the selling company with gross margin of 20%.
Assuming that LEO uses the equity method to account for its investment in MARS, what would be the NET increase to the investment in MARS account during 2020?

A) $16,000
B) $16,800
C) $17,550
D) $20,000

Question 30

LEO Inc. acquired a 60% interest in MARS Inc. on January 1, 2019 for $400,000. Unless otherwise stated, LEO uses the cost method to account for its investment MARS Inc. On the acquisition date, MARS had common stock and retained earnings valued at $100,000 and $150,000 respectively. The acquisition differential was allocated as follows: $80,000 to undervalued inventory.
$40,000 to undervalued equipment. (to be amortized over 20 years)
The following took place during 2019:
▪ MARS reported a net income and declared dividends of $25,000 and $5,000 respectively.
▪ LEO's December 31, 2019 inventory contained an intercompany profit of $10,000.
▪ LEO's net income was $75,000.
The following took place during 2020:
▪ MARS reported a net income and declared dividends of $36,000 and $6,000 respectively.
▪ MARS' December 31, 2020 inventory contained an intercompany profit of $5,000.
▪ LEO's net income was $48,000.
Both companies are subject to a 25% tax rate. All intercompany sales as well as sales to outsiders are priced to provide the selling company with gross margin of 20%.
What would be the change in the non-controlling interest account for 2019?

A) Non-controlling interest would decrease by $27,800.
B) Non-controlling interest would decrease by $18,000.
C) Non-controlling interest would increase by $18,000.
D) Non-controlling interest would increase by $27,800.

Question 31

Kho Inc. purchased 90% of the voting shares of Lan Inc. for $600,000 on January 1, 2019. On that date, Lan's common shares and retained earnings were valued at $200,000 and $250,000 respectively. Unless otherwise stated, assume that Kho uses the cost method to account for its investment in Lan Inc. Lan's fair values approximated its carrying values with the following exceptions:
Lan's trademark had a fair value which was $50,000 higher than its carrying value.
Lan's bonds payable had a fair value which was $20,000 higher than their carrying value.
The trademark had a useful life of exactly ten years remaining from the date of acquisition. The bonds payable mature on January 1, 2029. Both companies use straight line amortization exclusively.
The financial statements of both companies for the year ended December 31, 2020 are shown below:
Income Statements
$$\begin{array} { | l | r | r | } \hline & \text { Kho Inc. } & \text { Lan Inc. } \\\hline \text { Sales } & \$ 700,000 & \$ 640,000 \\\hline \text { Other Revenues } & \$ 300,000 & \$ 160,000 \\\hline \text { Less: Expenses: } & & \\\hline \text { Cost of Goods Sold } & \$ 280,000 & \$ 256,000 \\\hline \text { Depreciation Expense } & \$ 30,000 & \$ 14,000 \\\hline \text { Other Expenses } & \$ 240,000 & \$ 155,000 \\\hline \text { Income Tax Expense } & \$ 90,000 & \$ 75,000 \\\hline \text { Net Income } & \$ 360,000 & \$ 300,000 \\\hline\end{array}$$ Retained Earnings Statements
$\begin{array}{|l|r|r|}\hline & \text { Kho Inc. } & \text { Lan Inc } \\\hline \text { Balance, January 1, 2020 } & \$ 200,000 & \$ 100,000 \\\hline \text { Net Income } & \$ 360,000 & \$ 300,000 \\\hline \text { Less: Dividends } & \$ \$ 60,000 & \$ \$ 50,000 \\\hline \text { Retained Earnings, Dec 31, 2020 } & \$ 5500,000 & \$ 350,000 \\\hline \text { Balance Sheets } & & \\\hline & \text { Kho Inc. } & \text { Lan Inc } \\\hline \text { Cash } & \$ 200,000 & \$ 150,000 \\\hline \text { Accounts Receivable } & \$ 50,000 & \$ 150,000 \\\hline \text { Inventory } & \$ 50,000 & \$ 150,000 \\\hline \text { Investment in Lan Inc. } & \$ 600,000 & \\\hline \text { Equipment (net) } & \$ 500,000 & \$ 150,000 \\\hline \text { Trademark } & & \$ 200,000 \\\hline \text { Total Assets } & \mathbf{\$ 1 , 4 0 0 , 0 0 0} & \mathbf{\$ 8 0 0 , 0 0 0} \\\hline \text { Current Liabilities } & \$ 280,000 & \$ 150,000 \\\hline \text { Bonds Payable } & \$ 120,000 & \$ 100,000 \\\hline \text { Common Shares } & \$ 500,000 & \$ 200,000 \\\hline \text { Retained Earnings } & \$ 500,000 & \$ 350,000 \\\hline \text { Total Liabilities and Equity } & \$ 1,400,000 & \$ 800,000 \\\hline\end{array}$ Other Information:
A goodwill impairment test conducted during August 2020 revealed that the Lan's Goodwill amount on the date of acquisition had been impaired by $10,000.
During 2019, Kho sold $50,000 worth of inventory to Lan, half of which was sold to outsiders during the year. During 2020, Kho sold inventory to Lan for $90,000. Two-thirds of this inventory was resold by Lan to outside parties.
During 2019, Lan sold $30,000 worth of inventory to Kho, 80% of which was sold to outsiders during the year. During 2020, Lan sold inventory to Kho for $40,000. 75% of this inventory was resold by Kho to outside parties. As of December 31, 2020, Kho still owes $20,000 to Lan for the inventory.
All intercompany sales as well as sales to outsiders earn a gross margin on sales of 20%. The effective tax rate for both companies is 20%.
Since Kho acquired Lan, Kho has charged Lan an annual management fee of $30,000. Lan has paid Kho for the management services on December 31^st of each year.
Excluding any goodwill impairment losses, what would be the amount of changes to the acquisition differential for 2020?

A) $2,000
B) $2,700
C) $3,000
D) $4,000

Question 32

Kho Inc. purchased 90% of the voting shares of Lan Inc. for $600,000 on January 1, 2019. On that date, Lan's common shares and retained earnings were valued at $200,000 and $250,000 respectively. Unless otherwise stated, assume that Kho uses the cost method to account for its investment in Lan Inc. Lan's fair values approximated its carrying values with the following exceptions:
Lan's trademark had a fair value which was $50,000 higher than its carrying value.
Lan's bonds payable had a fair value which was $20,000 higher than their carrying value.
The trademark had a useful life of exactly ten years remaining from the date of acquisition. The bonds payable mature on January 1, 2029. Both companies use straight line amortization exclusively.
The financial statements of both companies for the year ended December 31, 2020 are shown below:
Income Statements
$$\begin{array} { | l | r | r | } \hline & \text { Kho Inc. } & \text { Lan Inc. } \\\hline \text { Sales } & \$ 700,000 & \$ 640,000 \\\hline \text { Other Revenues } & \$ 300,000 & \$ 160,000 \\\hline \text { Less: Expenses: } & & \\\hline \text { Cost of Goods Sold } & \$ 280,000 & \$ 256,000 \\\hline \text { Depreciation Expense } & \$ 30,000 & \$ 14,000 \\\hline \text { Other Expenses } & \$ 240,000 & \$ 155,000 \\\hline \text { Income Tax Expense } & \$ 90,000 & \$ 75,000 \\\hline \text { Net Income } & \$ 360,000 & \$ 300,000 \\\hline\end{array}$$ Retained Earnings Statements
$\begin{array}{|l|r|r|}\hline & \text { Kho Inc. } & \text { Lan Inc } \\\hline \text { Balance, January 1, 2020 } & \$ 200,000 & \$ 100,000 \\\hline \text { Net Income } & \$ 360,000 & \$ 300,000 \\\hline \text { Less: Dividends } & \$ \$ 60,000 & \$ \$ 50,000 \\\hline \text { Retained Earnings, Dec 31, 2020 } & \$ 5500,000 & \$ 350,000 \\\hline \text { Balance Sheets } & & \\\hline & \text { Kho Inc. } & \text { Lan Inc } \\\hline \text { Cash } & \$ 200,000 & \$ 150,000 \\\hline \text { Accounts Receivable } & \$ 50,000 & \$ 150,000 \\\hline \text { Inventory } & \$ 50,000 & \$ 150,000 \\\hline \text { Investment in Lan Inc. } & \$ 600,000 & \\\hline \text { Equipment (net) } & \$ 500,000 & \$ 150,000 \\\hline \text { Trademark } & & \$ 200,000 \\\hline \text { Total Assets } & \mathbf{\$ 1 , 4 0 0 , 0 0 0} & \mathbf{\$ 8 0 0 , 0 0 0} \\\hline \text { Current Liabilities } & \$ 280,000 & \$ 150,000 \\\hline \text { Bonds Payable } & \$ 120,000 & \$ 100,000 \\\hline \text { Common Shares } & \$ 500,000 & \$ 200,000 \\\hline \text { Retained Earnings } & \$ 500,000 & \$ 350,000 \\\hline \text { Total Liabilities and Equity } & \$ 1,400,000 & \$ 800,000 \\\hline\end{array}$ Other Information:
A goodwill impairment test conducted during August 2020 revealed that the Lan's Goodwill amount on the date of acquisition had been impaired by $10,000.
During 2019, Kho sold $50,000 worth of inventory to Lan, half of which was sold to outsiders during the year. During 2020, Kho sold inventory to Lan for $90,000. Two-thirds of this inventory was resold by Lan to outside parties.
During 2019, Lan sold $30,000 worth of inventory to Kho, 80% of which was sold to outsiders during the year. During 2020, Lan sold inventory to Kho for $40,000. 75% of this inventory was resold by Kho to outside parties. As of December 31, 2020, Kho still owes $20,000 to Lan for the inventory.
All intercompany sales as well as sales to outsiders earn a gross margin on sales of 20%. The effective tax rate for both companies is 20%.
Since Kho acquired Lan, Kho has charged Lan an annual management fee of $30,000. Lan has paid Kho for the management services on December 31^st of each year.
Ignoring taxes, what is the total amount of unrealized profits in inventory at the end of 2020?

A) Nil
B) $6,000
C) $7,800
D) $8,000

Question 33

LEO Inc. acquired a 60% interest in MARS Inc. on January 1, 2019 for $400,000. Unless otherwise stated, LEO uses the cost method to account for its investment in MARS Inc. On the acquisition date, MARS had common stock and retained earnings valued at $100,000 and $150,000 respectively. The acquisition differential was allocated as follows: $80,000 to undervalued inventory.
$40,000 to undervalued equipment. (to be amortized over 20 years)
The following took place during 2019:
▪ MARS reported a net income and declared dividends of $25,000 and $5,000 respectively.
▪ LEO's December 31, 2019 inventory contained an intercompany profit of $10,000.
▪ LEO's net income was $75,000.
The following took place during 2020:
▪ MARS reported a net income and declared dividends of $36,000 and $6,000 respectively.
▪ MARS' December 31, 2020 inventory contained an intercompany profit of $5,000.
▪ LEO's net income was $48,000.
Both companies are subject to a 25% tax rate. All intercompany sales as well as sales to outsiders are priced to provide the selling company with gross margin of 20%.
Consolidated net income attributable to the shareholders of the parent for 2020 would be:

A) $58,000.
B) $56,000.
C) $65,550.
D) $69,150.

Question 34

LEO Inc. acquired a 60% interest in MARS Inc. on January 1, 2019 for $400,000. Unless otherwise stated, LEO uses the cost method to account for its investment in MARS Inc. On the acquisition date, MARS had common stock and retained earnings valued at $100,000 and $150,000 respectively. The acquisition differential was allocated as follows: $80,000 to undervalued inventory.
$40,000 to undervalued equipment. (to be amortized over 20 years)
The following took place during 2019:
▪ MARS reported a net income and declared dividends of $25,000 and $5,000 respectively.
▪ LEO's December 31, 2019 inventory contained an intercompany profit of $10,000.
▪ LEO's net income was $75,000.
The following took place during 2020:
▪ MARS reported a net income and declared dividends of $36,000 and $6,000 respectively.
▪ MARS' December 31, 2020 inventory contained an intercompany profit of $5,000.
▪ LEO's net income was $48,000.
Both companies are subject to a 25% tax rate. All intercompany sales as well as sales to outsiders are priced to provide the selling company with gross margin of 20%.
What would be the amount of changes to the acquisition differential during 2019?

A) $78,000
B) $80,000
C) $82,000
D) $120,000Changes to acquisition differential on consolidated income statement 2019 = $82,000.Changes to Acquisition Differential Schedule

Question 35

Kho Inc. purchased 90% of the voting shares of Lan Inc. for $600,000 on January 1, 2019. On that date, Lan's common shares and retained earnings were valued at $200,000 and $250,000 respectively. Unless otherwise stated, assume that Kho uses the cost method to account for its investment in Lan Inc. Lan's fair values approximated its carrying values with the following exceptions:
Lan's trademark had a fair value which was $50,000 higher than its carrying value.
Lan's bonds payable had a fair value which was $20,000 higher than their carrying value.
The trademark had a useful life of exactly ten years remaining from the date of acquisition. The bonds payable mature on January 1, 2029. Both companies use straight line amortization exclusively.
The financial statements of both companies for the year ended December 31, 2020 are shown below:
Income Statements
$$\begin{array} { | l | r | r | } \hline & \text { Kho Inc. } & \text { Lan Inc. } \\\hline \text { Sales } & \$ 700,000 & \$ 640,000 \\\hline \text { Other Revenues } & \$ 300,000 & \$ 160,000 \\\hline \text { Less: Expenses: } & & \\\hline \text { Cost of Goods Sold } & \$ 280,000 & \$ 256,000 \\\hline \text { Depreciation Expense } & \$ 30,000 & \$ 14,000 \\\hline \text { Other Expenses } & \$ 240,000 & \$ 155,000 \\\hline \text { Income Tax Expense } & \$ 90,000 & \$ 75,000 \\\hline \text { Net Income } & \$ 360,000 & \$ 300,000 \\\hline\end{array}$$ Retained Earnings Statements
$\begin{array}{|l|r|r|}\hline & \text { Kho Inc. } & \text { Lan Inc } \\\hline \text { Balance, January 1, 2020 } & \$ 200,000 & \$ 100,000 \\\hline \text { Net Income } & \$ 360,000 & \$ 300,000 \\\hline \text { Less: Dividends } & \$ \$ 60,000 & \$ \$ 50,000 \\\hline \text { Retained Earnings, Dec 31, 2020 } & \$ 5500,000 & \$ 350,000 \\\hline \text { Balance Sheets } & & \\\hline & \text { Kho Inc. } & \text { Lan Inc } \\\hline \text { Cash } & \$ 200,000 & \$ 150,000 \\\hline \text { Accounts Receivable } & \$ 50,000 & \$ 150,000 \\\hline \text { Inventory } & \$ 50,000 & \$ 150,000 \\\hline \text { Investment in Lan Inc. } & \$ 600,000 & \\\hline \text { Equipment (net) } & \$ 500,000 & \$ 150,000 \\\hline \text { Trademark } & & \$ 200,000 \\\hline \text { Total Assets } & \mathbf{\$ 1 , 4 0 0 , 0 0 0} & \mathbf{\$ 8 0 0 , 0 0 0} \\\hline \text { Current Liabilities } & \$ 280,000 & \$ 150,000 \\\hline \text { Bonds Payable } & \$ 120,000 & \$ 100,000 \\\hline \text { Common Shares } & \$ 500,000 & \$ 200,000 \\\hline \text { Retained Earnings } & \$ 500,000 & \$ 350,000 \\\hline \text { Total Liabilities and Equity } & \$ 1,400,000 & \$ 800,000 \\\hline\end{array}$ Other Information:
A goodwill impairment test conducted during August 2020 revealed that the Lan's Goodwill amount on the date of acquisition had been impaired by $10,000.
During 2019, Kho sold $50,000 worth of inventory to Lan, half of which was sold to outsiders during the year. During 2020, Kho sold inventory to Lan for $90,000. Two-thirds of this inventory was resold by Lan to outside parties.
During 2019, Lan sold $30,000 worth of inventory to Kho, 80% of which was sold to outsiders during the year. During 2020, Lan sold inventory to Kho for $40,000. 75% of this inventory was resold by Kho to outside parties. As of December 31, 2020, Kho still owes $20,000 to Lan for the inventory.
All intercompany sales as well as sales to outsiders earn a gross margin on sales of 20%. The effective tax rate for both companies is 20%.
Since Kho acquired Lan, Kho has charged Lan an annual management fee of $30,000. Lan has paid Kho for the management services on December 31^st of each year.
What would be the amount appearing on the December 31, 2020 consolidated statement of financial position for trademarks?

A) $200,000
B) $236,000
C) $240,000
D) $245,000

Question 36

LEO Inc. acquired a 60% interest in MARS Inc. on January 1, 2019 for $400,000. Unless otherwise stated, LEO uses the cost method to account for its investment in MARS Inc. On the acquisition date, MARS had common stock and retained earnings valued at $100,000 and $150,000 respectively. The acquisition differential was allocated as follows: $80,000 to undervalued inventory.
$40,000 to undervalued equipment. (to be amortized over 20 years)
The following took place during 2019:
▪ MARS reported a net income and declared dividends of $25,000 and $5,000 respectively.
▪ LEO's December 31, 2019 inventory contained an intercompany profit of $10,000.
▪ LEO's net income was $75,000.
The following took place during 2020:
▪ MARS reported a net income and declared dividends of $36,000 and $6,000 respectively.
▪ MARS' December 31, 2020 inventory contained an intercompany profit of $5,000.
▪ LEO's net income was $48,000.
Both companies are subject to a 25% tax rate. All intercompany sales as well as sales to outsiders are priced to provide the selling company with gross margin of 20%.
Assuming that LEO uses the equity method to account for its investment in MARS, what would be the NET increase/decrease to the investment in MARS account during 2019?

A) $(49,200)
B) $(41,700)
C) $12,000
D) $43,200

Question 37

Kho Inc. purchased 90% of the voting shares of Lan Inc. for $600,000 on January 1, 2019. On that date, Lan's common shares and retained earnings were valued at $200,000 and $250,000 respectively. Unless otherwise stated, assume that Kho uses the cost method to account for its investment in Lan Inc. Lan's fair values approximated its carrying values with the following exceptions:
Lan's trademark had a fair value which was $50,000 higher than its carrying value.
Lan's bonds payable had a fair value which was $20,000 higher than their carrying value.
The trademark had a useful life of exactly ten years remaining from the date of acquisition. The bonds payable mature on January 1, 2029. Both companies use straight line amortization exclusively.
The financial statements of both companies for the year ended December 31, 2020 are shown below:
Income Statements
$$\begin{array} { | l | r | r | } \hline & \text { Kho Inc. } & \text { Lan Inc. } \\\hline \text { Sales } & \$ 700,000 & \$ 640,000 \\\hline \text { Other Revenues } & \$ 300,000 & \$ 160,000 \\\hline \text { Less: Expenses: } & & \\\hline \text { Cost of Goods Sold } & \$ 280,000 & \$ 256,000 \\\hline \text { Depreciation Expense } & \$ 30,000 & \$ 14,000 \\\hline \text { Other Expenses } & \$ 240,000 & \$ 155,000 \\\hline \text { Income Tax Expense } & \$ 90,000 & \$ 75,000 \\\hline \text { Net Income } & \$ 360,000 & \$ 300,000 \\\hline\end{array}$$ Retained Earnings Statements
$\begin{array}{|l|r|r|}\hline & \text { Kho Inc. } & \text { Lan Inc } \\\hline \text { Balance, January 1, 2020 } & \$ 200,000 & \$ 100,000 \\\hline \text { Net Income } & \$ 360,000 & \$ 300,000 \\\hline \text { Less: Dividends } & \$ \$ 60,000 & \$ \$ 50,000 \\\hline \text { Retained Earnings, Dec 31, 2020 } & \$ 5500,000 & \$ 350,000 \\\hline \text { Balance Sheets } & & \\\hline & \text { Kho Inc. } & \text { Lan Inc } \\\hline \text { Cash } & \$ 200,000 & \$ 150,000 \\\hline \text { Accounts Receivable } & \$ 50,000 & \$ 150,000 \\\hline \text { Inventory } & \$ 50,000 & \$ 150,000 \\\hline \text { Investment in Lan Inc. } & \$ 600,000 & \\\hline \text { Equipment (net) } & \$ 500,000 & \$ 150,000 \\\hline \text { Trademark } & & \$ 200,000 \\\hline \text { Total Assets } & \mathbf{\$ 1 , 4 0 0 , 0 0 0} & \mathbf{\$ 8 0 0 , 0 0 0} \\\hline \text { Current Liabilities } & \$ 280,000 & \$ 150,000 \\\hline \text { Bonds Payable } & \$ 120,000 & \$ 100,000 \\\hline \text { Common Shares } & \$ 500,000 & \$ 200,000 \\\hline \text { Retained Earnings } & \$ 500,000 & \$ 350,000 \\\hline \text { Total Liabilities and Equity } & \$ 1,400,000 & \$ 800,000 \\\hline\end{array}$ Other Information:
A goodwill impairment test conducted during August 2020 revealed that the Lan's Goodwill amount on the date of acquisition had been impaired by $10,000.
During 2019, Kho sold $50,000 worth of inventory to Lan, half of which was sold to outsiders during the year. During 2020, Kho sold inventory to Lan for $90,000. Two-thirds of this inventory was resold by Lan to outside parties.
During 2019, Lan sold $30,000 worth of inventory to Kho, 80% of which was sold to outsiders during the year. During 2020, Lan sold inventory to Kho for $40,000. 75% of this inventory was resold by Kho to outside parties. As of December 31, 2020, Kho still owes $20,000 to Lan for the inventory.
All intercompany sales as well as sales to outsiders earn a gross margin on sales of 20%. The effective tax rate for both companies is 20%.
Since Kho acquired Lan, Kho has charged Lan an annual management fee of $30,000. Lan has paid Kho for the management services on December 31^st of each year.
What effect (if any) would the unrealized profits in beginning inventory have on income tax expense for 2020?

A) They would cause a $1,240 reduction in income tax expense.
B) They would cause a $1,200 reduction in income tax expense.
C) They would cause a $1,200 increase in income tax expense.
D) They would cause a $1,240 increase in income tax expense.

Question 38

Kho Inc. purchased 90% of the voting shares of Lan Inc. for $600,000 on January 1, 2019. On that date, Lan's common shares and retained earnings were valued at $200,000 and $250,000 respectively. Unless otherwise stated, assume that Kho uses the cost method to account for its investment in Lan Inc. Lan's fair values approximated its carrying values with the following exceptions:
Lan's trademark had a fair value which was $50,000 higher than its carrying value.
Lan's bonds payable had a fair value which was $20,000 higher than their carrying value.
The trademark had a useful life of exactly ten years remaining from the date of acquisition. The bonds payable mature on January 1, 2029. Both companies use straight line amortization exclusively.
The financial statements of both companies for the year ended December 31, 2020 are shown below:
Income Statements
$$\begin{array} { | l | r | r | } \hline & \text { Kho Inc. } & \text { Lan Inc. } \\\hline \text { Sales } & \$ 700,000 & \$ 640,000 \\\hline \text { Other Revenues } & \$ 300,000 & \$ 160,000 \\\hline \text { Less: Expenses: } & & \\\hline \text { Cost of Goods Sold } & \$ 280,000 & \$ 256,000 \\\hline \text { Depreciation Expense } & \$ 30,000 & \$ 14,000 \\\hline \text { Other Expenses } & \$ 240,000 & \$ 155,000 \\\hline \text { Income Tax Expense } & \$ 90,000 & \$ 75,000 \\\hline \text { Net Income } & \$ 360,000 & \$ 300,000 \\\hline\end{array}$$ Retained Earnings Statements
$\begin{array}{|l|r|r|}\hline & \text { Kho Inc. } & \text { Lan Inc } \\\hline \text { Balance, January 1, 2020 } & \$ 200,000 & \$ 100,000 \\\hline \text { Net Income } & \$ 360,000 & \$ 300,000 \\\hline \text { Less: Dividends } & \$ \$ 60,000 & \$ \$ 50,000 \\\hline \text { Retained Earnings, Dec 31, 2020 } & \$ 5500,000 & \$ 350,000 \\\hline \text { Balance Sheets } & & \\\hline & \text { Kho Inc. } & \text { Lan Inc } \\\hline \text { Cash } & \$ 200,000 & \$ 150,000 \\\hline \text { Accounts Receivable } & \$ 50,000 & \$ 150,000 \\\hline \text { Inventory } & \$ 50,000 & \$ 150,000 \\\hline \text { Investment in Lan Inc. } & \$ 600,000 & \\\hline \text { Equipment (net) } & \$ 500,000 & \$ 150,000 \\\hline \text { Trademark } & & \$ 200,000 \\\hline \text { Total Assets } & \mathbf{\$ 1 , 4 0 0 , 0 0 0} & \mathbf{\$ 8 0 0 , 0 0 0} \\\hline \text { Current Liabilities } & \$ 280,000 & \$ 150,000 \\\hline \text { Bonds Payable } & \$ 120,000 & \$ 100,000 \\\hline \text { Common Shares } & \$ 500,000 & \$ 200,000 \\\hline \text { Retained Earnings } & \$ 500,000 & \$ 350,000 \\\hline \text { Total Liabilities and Equity } & \$ 1,400,000 & \$ 800,000 \\\hline\end{array}$ Other Information:
A goodwill impairment test conducted during August 2020 revealed that the Lan's Goodwill amount on the date of acquisition had been impaired by $10,000.
During 2019, Kho sold $50,000 worth of inventory to Lan, half of which was sold to outsiders during the year. During 2020, Kho sold inventory to Lan for $90,000. Two-thirds of this inventory was resold by Lan to outside parties.
During 2019, Lan sold $30,000 worth of inventory to Kho, 80% of which was sold to outsiders during the year. During 2020, Lan sold inventory to Kho for $40,000. 75% of this inventory was resold by Kho to outside parties. As of December 31, 2020, Kho still owes $20,000 to Lan for the inventory.
All intercompany sales as well as sales to outsiders earn a gross margin on sales of 20%. The effective tax rate for both companies is 20%.
Since Kho acquired Lan, Kho has charged Lan an annual management fee of $30,000. Lan has paid Kho for the management services on December 31^st of each year.
What effect (if any) would the unrealized profits in ending inventory have on income tax expense for 2020?

A) They would cause a $1,600 reduction in income tax expense.
B) They would cause a $1,200 reduction in income tax expense.
C) They would cause a $1,200 increase in income tax expense.
D) They would cause a $1,600 increase in income tax expense.

Question 39

Kho Inc. purchased 90% of the voting shares of Lan Inc. for $600,000 on January 1, 2019. On that date, Lan's common shares and retained earnings were valued at $200,000 and $250,000 respectively. Unless otherwise stated, assume that Kho uses the cost method to account for its investment in Lan Inc. Lan's fair values approximated its carrying values with the following exceptions:
Lan's trademark had a fair value which was $50,000 higher than its carrying value.
Lan's bonds payable had a fair value which was $20,000 higher than their carrying value.
The trademark had a useful life of exactly ten years remaining from the date of acquisition. The bonds payable mature on January 1, 2029. Both companies use straight line amortization exclusively.
The financial statements of both companies for the year ended December 31, 2020 are shown below:
Income Statements
$\begin{array}{|l|r|r|}\hline & \text { Kho Inc. } & \text { Lan Inc. } \\\hline \text { Sales } & \$ 700,000 & \$ 640,000 \\\hline \text { Other Revenues } & \$ 300,000 & \$ 160,000 \\\hline \text { Less: Expenses: } & & \\\hline \text { Cost of Goods Sold } & \$ 280,000 & \$ 256,000 \\\hline \text { Depreciation Expense } & \$ 30,000 & \$ 14,000 \\\hline \text { Other Expenses } & \$ 240,000 & \$ 155,000 \\\hline \text { Income Tax Expense } & \$ 90,000 & \$ 75,000 \\\hline \text { Net Income } & \$ 360,000 & \$ 300,000 \\\hline\end{array}$ Retained Earnings Statements
$\begin{array}{|l|r|r|}\hline & \text { Kho Inc. } & \text { Lan Inc } \\\hline \text { Balance, January 1, 2020 } & \$ 200,000 & \$ 100,000 \\\hline \text { Net Income } & \$ 360,000 & \$ 300,000 \\\hline \text { Less: Dividends } & \$ \$ 60,000 & \$ \$ 50,000 \\\hline \text { Retained Earnings, Dec 31, 2020 } & \$ 5500,000 & \$ 350,000 \\\hline \text { Balance Sheets } & & \\\hline & \text { Kho Inc. } & \text { Lan Inc } \\\hline \text { Cash } & \$ 200,000 & \$ 150,000 \\\hline \text { Accounts Receivable } & \$ 50,000 & \$ 150,000 \\\hline \text { Inventory } & \$ 50,000 & \$ 150,000 \\\hline \text { Investment in Lan Inc. } & \$ 600,000 & \\\hline \text { Equipment (net) } & \$ 500,000 & \$ 150,000 \\\hline \text { Trademark } & & \$ 200,000 \\\hline \text { Total Assets } & \mathbf{\$ 1 , 4 0 0 , 0 0 0} & \mathbf{\$ 8 0 0 , 0 0 0} \\\hline \text { Current Liabilities } & \$ 280,000 & \$ 150,000 \\\hline \text { Bonds Payable } & \$ 120,000 & \$ 100,000 \\\hline \text { Common Shares } & \$ 500,000 & \$ 200,000 \\\hline \text { Retained Earnings } & \$ 500,000 & \$ 350,000 \\\hline \text { Total Liabilities and Equity } & \$ 1,400,000 & \$ 800,000 \\\hline\end{array}$ Other Information:
A goodwill impairment test conducted during August 2020 revealed that the Lan's Goodwill amount on the date of acquisition had been impaired by $10,000.
During 2019, Kho sold $50,000 worth of inventory to Lan, half of which was sold to outsiders during the year. During 2020, Kho sold inventory to Lan for $90,000. Two-thirds of this inventory was resold by Lan to outside parties.
During 2019, Lan sold $30,000 worth of inventory to Kho, 80% of which was sold to outsiders during the year. During 2020, Lan sold inventory to Kho for $40,000. 75% of this inventory was resold by Kho to outside parties. As of December 31, 2020, Kho still owes $20,000 to Lan for the inventory.
All intercompany sales as well as sales to outsiders earn a gross margin on sales of 20%. The effective tax rate for both companies is 20%.
Since Kho acquired Lan, Kho has charged Lan an annual management fee of $30,000. Lan has paid Kho for the management services on December 31^st of each year.
Ignoring taxes, what is the total amount of pre-tax profit from 2019 intercompany sales that was realized during 2019?

A) Nil.
B) $5,000.
C) $6,200.
D) $9,800.

Question 40

Kho Inc. purchased 90% of the voting shares of Lan Inc. for $600,000 on January 1, 2019. On that date, Lan's common shares and retained earnings were valued at $200,000 and $250,000 respectively. Unless otherwise stated, assume that Kho uses the cost method to account for its investment in Lan Inc. Lan's fair values approximated its carrying values with the following exceptions:
Lan's trademark had a fair value which was $50,000 higher than its carrying value.
Lan's bonds payable had a fair value which was $20,000 higher than their carrying value.
The trademark had a useful life of exactly ten years remaining from the date of acquisition. The bonds payable mature on January 1, 2029. Both companies use straight line amortization exclusively.
The financial statements of both companies for the year ended December 31, 2020 are shown below:
Income Statements
$$\begin{array} { | l | r | r | } \hline & \text { Kho Inc. } & \text { Lan Inc. } \\\hline \text { Sales } & \$ 700,000 & \$ 640,000 \\\hline \text { Other Revenues } & \$ 300,000 & \$ 160,000 \\\hline \text { Less: Expenses: } & & \\\hline \text { Cost of Goods Sold } & \$ 280,000 & \$ 256,000 \\\hline \text { Depreciation Expense } & \$ 30,000 & \$ 14,000 \\\hline \text { Other Expenses } & \$ 240,000 & \$ 155,000 \\\hline \text { Income Tax Expense } & \$ 90,000 & \$ 75,000 \\\hline \text { Net Income } & \$ 360,000 & \$ 300,000 \\\hline\end{array}$$ Retained Earnings Statements
$\begin{array}{|l|r|r|}\hline & \text { Kho Inc. } & \text { Lan Inc } \\\hline \text { Balance, January 1, 2020 } & \$ 200,000 & \$ 100,000 \\\hline \text { Net Income } & \$ 360,000 & \$ 300,000 \\\hline \text { Less: Dividends } & \$ \$ 60,000 & \$ \$ 50,000 \\\hline \text { Retained Earnings, Dec 31, 2020 } & \$ 5500,000 & \$ 350,000 \\\hline \text { Balance Sheets } & & \\\hline & \text { Kho Inc. } & \text { Lan Inc } \\\hline \text { Cash } & \$ 200,000 & \$ 150,000 \\\hline \text { Accounts Receivable } & \$ 50,000 & \$ 150,000 \\\hline \text { Inventory } & \$ 50,000 & \$ 150,000 \\\hline \text { Investment in Lan Inc. } & \$ 600,000 & \\\hline \text { Equipment (net) } & \$ 500,000 & \$ 150,000 \\\hline \text { Trademark } & & \$ 200,000 \\\hline \text { Total Assets } & \mathbf{\$ 1 , 4 0 0 , 0 0 0} & \mathbf{\$ 8 0 0 , 0 0 0} \\\hline \text { Current Liabilities } & \$ 280,000 & \$ 150,000 \\\hline \text { Bonds Payable } & \$ 120,000 & \$ 100,000 \\\hline \text { Common Shares } & \$ 500,000 & \$ 200,000 \\\hline \text { Retained Earnings } & \$ 500,000 & \$ 350,000 \\\hline \text { Total Liabilities and Equity } & \$ 1,400,000 & \$ 800,000 \\\hline\end{array}$ Other Information:
A goodwill impairment test conducted during August 2020 revealed that the Lan's Goodwill amount on the date of acquisition had been impaired by $10,000.
During 2019, Kho sold $50,000 worth of inventory to Lan, half of which was sold to outsiders during the year. During 2020, Kho sold inventory to Lan for $90,000. Two-thirds of this inventory was resold by Lan to outside parties.
During 2019, Lan sold $30,000 worth of inventory to Kho, 80% of which was sold to outsiders during the year. During 2020, Lan sold inventory to Kho for $40,000. 75% of this inventory was resold by Kho to outside parties. As of December 31, 2020, Kho still owes $20,000 to Lan for the inventory.
All intercompany sales as well as sales to outsiders earn a gross margin on sales of 20%. The effective tax rate for both companies is 20%.
Since Kho acquired Lan, Kho has charged Lan an annual management fee of $30,000. Lan has paid Kho for the management services on December 31^st of each year.
What would be the non-controlling interest amount appearing on Kho's consolidated statement of financial position on the date of acquisition?

A) $29,936
B) $30,000
C) $66,667
D) $120,000

Question 41

On June 30, 2018, Parent Company sold some land to its subsidiary for $240,000. The land had cost Parent Company $120,000 when it was acquired three years previously. The transaction was subject to income tax at a rate of 20%. On June 30, 2020, the subsidiary sold the land to an outside party for $275,000. This transaction was also subject to income tax at a 20% rate. Parent Company owns 75% of the outstanding shares of its subsidiary and accounts for its investment using the cost method. What effect will the elimination of the unrealized intercompany gain (in the preparation of the consolidated income statement) have on consolidated income tax expense for 2018?

A) It will have no effect.
B) It will reduce income tax expense by $24,000.
C) It will reduce income tax expense by $18,000.
D) It will increase income tax expense by $24,000.

Question 42

MAX Inc. purchased 80% of the voting shares of MIN Inc for $750,000 on January 1, 2018. On that date, MAX's common shares and retained earnings were valued at $300,000 and $150,000 respectively. Unless otherwise stated, assume that MAX uses the cost method to account for its investment in MIN Inc.
MIN's fair values approximated its carrying values with the following exceptions:
MIN's trademark had a fair value which was $80,000 higher than its carrying value.
MIN's bonds payable had a fair value which was $30,000 higher than their carrying value.
The trademark had a useful life of exactly twenty years remaining from the date of acquisition. The bonds payable mature on January 1, 2038. Both companies use straight line amortization exclusively.
The financial statements of both companies for the year ended December 31, 2020 are shown below:
Income Statements
Retained Earnings Statements
Other Information:
A goodwill impairment test conducted during August 2020 revealed that the MIN's goodwill amount on the date of acquisition had been impaired by $5,000.
During 2019, MAX sold $60,000 worth of inventory to MIN, 80% of which was sold to outsiders during the year. During 2020, MAX sold inventory to MIN for $80,000. 75% of this inventory was resold by MIN to outside parties during that year.
During 2019, MIN sold $40,000 worth of Inventory to MAX, 80% of which was sold to outsiders during the year. During 2020, MIN sold inventory to MAX for $50,000. 80% of this inventory was resold by MAX to outside parties during that year.
On April 1, 2020, MAX sold land to MIN for $100,000. MAX originally acquired the land for $40,000 in 2015.
All intercompany sales as well as sales to outsiders are priced 25% above cost. The effective tax rate for both companies is 50%.
Compute MAX's Consolidated Net Income for 2020.

Question 43

On June 30, 2018, Parent Company sold some land to its subsidiary for $240,000. The land had cost Parent Company $120,000 when it was acquired three years previously. The transaction was subject to income tax at a rate of 20%. On June 30, 2020, the subsidiary sold the land to an outside party for $275,000. This transaction was also subject to income tax at a 20% rate. Parent Company owns 75% of the outstanding shares of its subsidiary and accounts for its investment using the cost method. On December 31, 2019, the land account balance in the books of Parent Company is $300,000 and in the books of the subsidiary is $340,000. No acquisition differential was allocated to land. What will be the amount of land in the consolidated balance sheet at December 31, 2019?

A) $520,000
B) $544,000.
C) $550,000
D) $640,000

Question 44

LEO Inc. acquired a 60% interest in MARS Inc. on January 1, 2019 for $400,000. Unless otherwise stated, LEO uses the cost method to account for its investment in MARS Inc. On the acquisition date, MARS had common stock and retained earnings valued at $100,000 and $150,000 respectively. The acquisition differential was allocated as follows: $80,000 to undervalued inventory.
$40,000 to undervalued equipment. (to be amortized over 20 years)
The following took place during 2019:
▪ MARS reported a net income and declared dividends of $25,000 and $5,000 respectively.
▪ LEO's December 31, 2019 inventory contained an intercompany profit of $10,000.
▪ LEO's net income was $75,000.
The following took place during 2020:
▪ MARS reported a net income and declared dividends of $36,000 and $6,000 respectively.
▪ MARS' December 31, 2020 inventory contained an intercompany profit of $5,000.
▪ LEO's net income was $48,000.
Both companies are subject to a 25% tax rate. All intercompany sales as well as sales to outsiders are priced to provide the selling company with gross margin of 20%.
What would be the balance in the investment in MARS account at December 31, 2020?

A) $348,000
B) $330,000
C) $375,850
D) $400,000

Question 45

LEO Inc. acquired a 60% interest in MARS Inc. on January 1, 2019 for $400,000. Unless otherwise stated, LEO uses the cost method to account for its investment in MARS Inc. On the acquisition date, MARS had common stock and retained earnings valued at $100,000 and $150,000 respectively. The acquisition differential was allocated as follows: $80,000 to undervalued inventory.
$40,000 to undervalued equipment. (to be amortized over 20 years)
The following took place during 2019:
▪ MARS reported a net income and declared dividends of $25,000 and $5,000 respectively.
▪ LEO's December 31, 2019 inventory contained an intercompany profit of $10,000.
▪ LEO's net income was $75,000.
The following took place during 2020:
▪ MARS reported a net income and declared dividends of $36,000 and $6,000 respectively.
▪ MARS' December 31, 2020 inventory contained an intercompany profit of $5,000.
▪ LEO's net income was $48,000.
Both companies are subject to a 25% tax rate. All intercompany sales as well as sales to outsiders are priced to provide the selling company with gross margin of 20%.
What would be the balance in the non-controlling interest account on the date of acquisition?

A) $266,667.
B) $397,000.
C) $400,000.
D) $403,000.

Question 46

On June 30, 2018, Parent Company sold some land to its subsidiary for $240,000. The land had cost Parent Company $120,000 when it was acquired three years previously. The transaction was subject to income tax at a rate of 20%. On June 30, 2020, the subsidiary sold the land to an outside party for $275,000. This transaction was also subject to income tax at a 20% rate. Parent Company owns 75% of the outstanding shares of its subsidiary and accounts for its investment using the cost method. On December 31, 2018, the land account balance in the books of Parent Company is $300,000 and in the books of the subsidiary is $300,000. No acquisition differential was allocated to land. What will be the amount of land in the consolidated balance sheet at December 31, 2018?

A) $480,000
B) $504,000
C) $510,000
D) $600,000

Question 47

MAX Inc. purchased 80% of the voting shares of MIN Inc for $750,000 on January 1, 2018. On that date, MAX's common shares and retained earnings were valued at $300,000 and $150,000 respectively. Unless otherwise stated, assume that MAX uses the cost method to account for its investment in MIN Inc.
MIN's fair values approximated its carrying values with the following exceptions:
MIN's trademark had a fair value which was $80,000 higher than its carrying value.
MIN's bonds payable had a fair value which was $30,000 higher than their carrying value.
The trademark had a useful life of exactly twenty years remaining from the date of acquisition. The bonds payable mature on January 1, 2038. Both companies use straight line amortization exclusively.
The financial statements of both companies for the year ended December 31, 2020 are shown below:
Income Statements
Retained Earnings Statements
Other Information:
A goodwill impairment test conducted during August 2020 revealed that the MIN's goodwill amount on the date of acquisition had been impaired by $5,000.
During 2019, MAX sold $60,000 worth of inventory to MIN, 80% of which was sold to outsiders during the year. During 2020, MAX sold inventory to MIN for $80,000. 75% of this inventory was resold by MIN to outside parties during that year.
During 2019, MIN sold $40,000 worth of Inventory to MAX, 80% of which was sold to outsiders during the year. During 2020, MIN sold inventory to MAX for $50,000. 80% of this inventory was resold by MAX to outside parties during that year.
On April 1, 2020, MAX sold land to MIN for $100,000. MAX originally acquired the land for $40,000 in 2015.
All intercompany sales as well as sales to outsiders are priced 25% above cost. The effective tax rate for both companies is 50%.
Compute MAX's goodwill at the date of acquisition.

Question 48

MAX Inc. purchased 80% of the voting shares of MIN Inc for $750,000 on January 1, 2018. On that date, MAX's common shares and retained earnings were valued at $300,000 and $150,000 respectively. Unless otherwise stated, assume that MAX uses the cost method to account for its investment in MIN Inc.
MIN's fair values approximated its carrying values with the following exceptions:
MIN's trademark had a fair value which was $80,000 higher than its carrying value.
MIN's bonds payable had a fair value which was $30,000 higher than their carrying value.
The trademark had a useful life of exactly twenty years remaining from the date of acquisition. The bonds payable mature on January 1, 2038. Both companies use straight line amortization exclusively.
The financial statements of both companies for the year ended December 31, 2020 are shown below:
Income Statements
Retained Earnings Statements
Other Information:
A goodwill impairment test conducted during August 2020 revealed that the MIN's goodwill amount on the date of acquisition had been impaired by $5,000.
During 2019, MAX sold $60,000 worth of inventory to MIN, 80% of which was sold to outsiders during the year. During 2020, MAX sold inventory to MIN for $80,000. 75% of this inventory was resold by MIN to outside parties during that year.
During 2019, MIN sold $40,000 worth of Inventory to MAX, 80% of which was sold to outsiders during the year. During 2020, MIN sold inventory to MAX for $50,000. 80% of this inventory was resold by MAX to outside parties during that year.
On April 1, 2020, MAX sold land to MIN for $100,000. MAX originally acquired the land for $40,000 in 2015.
All intercompany sales as well as sales to outsiders are priced 25% above cost. The effective tax rate for both companies is 50%.
Prepare a schedule of Realized and Unrealized Profits/Gains for 2020 for both companies. Show your figures before and after tax.

Question 49

P Inc. owns 70% of Q Inc.
During 2019, P Inc sold inventory to Q for $20,000. Half of this inventory remained in Q's warehouse at December 31, 2019 year end.
On January 1, 2019, Q Inc had inventory in its warehouse which was purchased from P for $5,000. This inventory was sold to an outside party during 2019.
Also during 2019, Q Inc sold inventory to P Inc. for $10,000. 50% of this inventory remained in P's warehouse at year end.
Both companies are subject to a tax rate of 25%. The gross profit percentage on sales is 30% for both companies.
P Inc. uses the cost method to account for its Investment in Q Inc. The inventories of both companies as at December 31, 2019 were all sold to outsiders during 2020. There were no intercompany transactions during 2020.
Prepare a schedule showing the realized and unrealized profits resulting from downstream transactions (i.e. P Inc. selling to Q Inc.) for 2019 and 2020. Your schedule should include both pre-tax and after-tax amounts.

Question 50

On June 30, 2018, Parent Company sold some land to its subsidiary for $240,000. The land had cost Parent Company $120,000 when it was acquired three years previously. The transaction was subject to income tax at a rate of 20%. On June 30, 2020, the subsidiary sold the land to an outside party for $275,000. This transaction was also subject to income tax at a 20% rate. Parent Company owns 75% of the outstanding shares of its subsidiary and accounts for its investment using the cost method. What effect will the adjustment for the realization of the intercompany gain (in the preparation of the consolidated income statement) have on the non-controlling interest in income for 2020?

A) It will have no effect on the non-controlling interest in income.
B) It will decrease the non-controlling interest in income by $24,000.
C) It will increase the non-controlling interest in income by $24,000.
D) It will increase the non-controlling interest in income by $30,000.

Question 51

On June 30, 2018, Parent Company sold some land to its subsidiary for $240,000. The land had cost Parent Company $120,000 when it was acquired three years previously. The transaction was subject to income tax at a rate of 20%. On June 30, 2020, the subsidiary sold the land to an outside party for $275,000. This transaction was also subject to income tax at a 20% rate. Parent Company owns 75% of the outstanding shares of its subsidiary and accounts for its investment using the cost method. What amount will appear on the "Gain on sale of land" line in Parent Company's consolidated income statement for the year ended December 31, 2020?

A) $0
B) $93,000
C) $124,000
D) $155,000

Question 52

YIN Inc. purchased 75% of the voting shares of YANG Inc for $500,000 on July 1, 2017. On that date, YANG Inc.'s Common Shares and Retained Earnings were valued at $200,000 and $100,000 respectively. Unless otherwise stated, assume that YIN uses the cost method to account for its investment in YANG Inc.
YANG's fair values approximated its carrying values with the following exception:
YANG's bonds payable had a fair value which was $50,000 higher than their carrying value.
The bonds payable mature on July 1, 2027. Both companies use straight line amortization exclusively.
The Financial Statements of both companies for the Year ended June 30, 2020 are shown below:
Income Statements
Retained Earnings Statements
Other Information:
During August of 2018, YIN sold $60,000 worth of Inventory to YANG, 80% of which was sold to outsiders during the year. During October of 2019, YIN sold inventory to YANG for $90,000 of which two-thirds of this inventory was resold by YANG to outside parties later that year.
During September of 2018, YANG sold $90,000 worth of inventory to YIN, 50% of which was sold to outsiders during the year. During April of 2020, Yang sold inventory to YIN for $120,000. 80% of this inventory was resold by YANG to outside parties in May.
During May of 2020, YANG sold a plot of Land to YIN for $40,000. The land was recorded at cost of $24,000 on YANG's books prior to the sale. YIN has not yet sold the land.
All intercompany sales as well as sales to outsiders are priced 50% above cost. The effective tax rate for both companies is 40%.
Compute YIN's Goodwill at the date of acquisition.

Question 53

YIN Inc. purchased 75% of the voting shares of YANG Inc for $500,000 on July 1, 2017. On that date, YANG Inc.'s Common Shares and Retained Earnings were valued at $200,000 and $100,000 respectively. Unless otherwise stated, assume that YIN uses the cost method to account for its investment in YANG Inc.
YANG's fair values approximated its carrying values with the following exception:
YANG's bonds payable had a fair value which was $50,000 higher than their carrying value.
The bonds payable mature on July 1, 2027. Both companies use straight line amortization exclusively.
The Financial Statements of both companies for the Year ended June 30, 2020 are shown below:
Income Statements
Retained Earnings Statements
Other Information:
During August of 2018, YIN sold $60,000 worth of Inventory to YANG, 80% of which was sold to outsiders during the year. During October of 2019, YIN sold inventory to YANG for $90,000 of which two-thirds of this inventory was resold by YANG to outside parties later that year.
During September of 2018, YANG sold $90,000 worth of inventory to YIN, 50% of which was sold to outsiders during the year. During April of 2020, Yang sold inventory to YIN for $120,000. 80% of this inventory was resold by YANG to outside parties in May.
During May of 2020, YANG sold a plot of Land to YIN for $40,000. The land was recorded at cost of $24,000 on YANG's books prior to the sale. YIN has not yet sold the land.
All intercompany sales as well as sales to outsiders are priced 50% above cost. The effective tax rate for both companies is 40%.
Prepare a schedule of realized and unrealized profits for the fiscal year ended June 30, 2020 for both companies. Show your figures before and after tax.

Question 54

MAX Inc. purchased 80% of the voting shares of MIN Inc for $750,000 on January 1, 2018. On that date, MAX's common shares and retained earnings were valued at $300,000 and $150,000 respectively. Unless otherwise stated, assume that MAX uses the cost method to account for its investment in MIN Inc.
MIN's fair values approximated its carrying values with the following exceptions:
MIN's trademark had a fair value which was $80,000 higher than its carrying value.
MIN's bonds payable had a fair value which was $30,000 higher than their carrying value.
The trademark had a useful life of exactly twenty years remaining from the date of acquisition. The bonds payable mature on January 1, 2038. Both companies use straight line amortization exclusively.
The financial statements of both companies for the year ended December 31, 2020 are shown below:
Income Statements
Retained Earnings Statements
Other Information:
A goodwill impairment test conducted during August 2020 revealed that the MIN's goodwill amount on the date of acquisition had been impaired by $5,000.
During 2019, MAX sold $60,000 worth of inventory to MIN, 80% of which was sold to outsiders during the year. During 2020, MAX sold inventory to MIN for $80,000. 75% of this inventory was resold by MIN to outside parties during that year.
During 2019, MIN sold $40,000 worth of Inventory to MAX, 80% of which was sold to outsiders during the year. During 2020, MIN sold inventory to MAX for $50,000. 80% of this inventory was resold by MAX to outside parties during that year.
On April 1, 2020, MAX sold land to MIN for $100,000. MAX originally acquired the land for $40,000 in 2015.
All intercompany sales as well as sales to outsiders are priced 25% above cost. The effective tax rate for both companies is 50%.
Calculate the non-controlling interest (Balance Sheet) as at December 31, 2020.

Question 55

On June 30, 2018, Parent Company sold some land to its subsidiary for $240,000. The land had cost Parent Company $120,000 when it was acquired three years previously. The transaction was subject to income tax at a rate of 20%. On June 30, 2020, the subsidiary sold the land to an outside party for $275,000. This transaction was also subject to income tax at a 20% rate. Parent Company owns 75% of the outstanding shares of its subsidiary and accounts for its investment using the cost method. What amount will appear on the "Gain on sale of land" line in Parent Company's consolidated income statement for the year ended December 31, 2018?

A) $0
B) $96,000
C) $120,000
D) $240,000

Question 56

MAX Inc. purchased 80% of the voting shares of MIN Inc for $750,000 on January 1, 2018. On that date, MAX's common shares and retained earnings were valued at $300,000 and $150,000 respectively. Unless otherwise stated, assume that MAX uses the cost method to account for its investment in MIN Inc.
MIN's fair values approximated its carrying values with the following exceptions:
MIN's trademark had a fair value which was $80,000 higher than its carrying value.
MIN's bonds payable had a fair value which was $30,000 higher than their carrying value.
The trademark had a useful life of exactly twenty years remaining from the date of acquisition. The bonds payable mature on January 1, 2038. Both companies use straight line amortization exclusively.
The financial statements of both companies for the year ended December 31, 2020 are shown below:
Income Statements
Retained Earnings Statements
Other Information:
A goodwill impairment test conducted during August 2020 revealed that the MIN's goodwill amount on the date of acquisition had been impaired by $5,000.
During 2019, MAX sold $60,000 worth of inventory to MIN, 80% of which was sold to outsiders during the year. During 2020, MAX sold inventory to MIN for $80,000. 75% of this inventory was resold by MIN to outside parties during that year.
During 2019, MIN sold $40,000 worth of Inventory to MAX, 80% of which was sold to outsiders during the year. During 2020, MIN sold inventory to MAX for $50,000. 80% of this inventory was resold by MAX to outside parties during that year.
On April 1, 2020, MAX sold land to MIN for $100,000. MAX originally acquired the land for $40,000 in 2015.
All intercompany sales as well as sales to outsiders are priced 25% above cost. The effective tax rate for both companies is 50%.
Prepare MAX's Consolidated Statement of Financial Position as at December 31, 2020.

Question 57

MAX Inc. purchased 80% of the voting shares of MIN Inc for $750,000 on January 1, 2018. On that date, MAX's common shares and retained earnings were valued at $300,000 and $150,000 respectively. Unless otherwise stated, assume that MAX uses the cost method to account for its investment in MIN Inc.
MIN's fair values approximated its carrying values with the following exceptions:
MIN's trademark had a fair value which was $80,000 higher than its carrying value.
MIN's bonds payable had a fair value which was $30,000 higher than their carrying value.
The trademark had a useful life of exactly twenty years remaining from the date of acquisition. The bonds payable mature on January 1, 2038. Both companies use straight line amortization exclusively.
The financial statements of both companies for the year ended December 31, 2020 are shown below:
Income Statements
Retained Earnings Statements
Other Information:
A goodwill impairment test conducted during August 2020 revealed that the MIN's goodwill amount on the date of acquisition had been impaired by $5,000.
During 2019, MAX sold $60,000 worth of inventory to MIN, 80% of which was sold to outsiders during the year. During 2020, MAX sold inventory to MIN for $80,000. 75% of this inventory was resold by MIN to outside parties during that year.
During 2019, MIN sold $40,000 worth of Inventory to MAX, 80% of which was sold to outsiders during the year. During 2020, MIN sold inventory to MAX for $50,000. 80% of this inventory was resold by MAX to outside parties during that year.
On April 1, 2020, MAX sold land to MIN for $100,000. MAX originally acquired the land for $40,000 in 2015.
All intercompany sales as well as sales to outsiders are priced 25% above cost. The effective tax rate for both companies is 50%.
Calculate Consolidated Retained Earnings as at December 31, 2020.

Question 58

On June 30, 2018, Parent Company sold some land to its subsidiary for $240,000. The land had cost Parent Company $120,000 when it was acquired three years previously. The transaction was subject to income tax at a rate of 20%. On June 30, 2020, the subsidiary sold the land to an outside party for $275,000. This transaction was also subject to income tax at a 20% rate. Parent Company owns 75% of the outstanding shares of its subsidiary and accounts for its investment using the cost method. What effect will the adjustment for the realization of the intercompany gain (in the preparation of the consolidated income statement) have on consolidated income tax expense for 2020?

A) It will have no effect.
B) It will reduce income tax expense by $24,000.
C) It will reduce income tax expense by $18,000.
D) It will increase income tax expense by $24,000.

Question 59

P Inc. owns 70% of Q Inc.
During 2019, P Inc sold inventory to Q for $20,000. Half of this inventory remained in Q's warehouse at December 31, 2019 year end.
On January 1, 2019, Q Inc had inventory in its warehouse which was purchased from P for $5,000. This inventory was sold to an outside party during 2019.
Also during 2019, Q Inc sold inventory to P Inc. for $10,000. 50% of this inventory remained in P's warehouse at year end.
Both companies are subject to a tax rate of 25%. The gross profit percentage on sales is 30% for both companies.
P Inc. uses the cost method to account for its Investment in Q Inc. The inventories of both companies as at December 31, 2019 were all sold to outsiders during 2020. There were no intercompany transactions during 2020.
Prepare a schedule showing the realized and unrealized profits resulting from upstream transactions (i.e. Q Inc. selling to P Inc.) for 2019 and 2020. Your schedule should include both pre-tax and after-tax amounts.

Question 60

LEO Inc. acquired a 60% interest in MARS Inc. on January 1, 2019 for $400,000. Unless otherwise stated, LEO uses the cost method to account for its investment in MARS Inc. On the acquisition date, MARS had common stock and retained earnings valued at $100,000 and $150,000 respectively. The acquisition differential was allocated as follows: $80,000 to undervalued inventory.
$40,000 to undervalued equipment. (to be amortized over 20 years)
The following took place during 2019:
▪ MARS reported a net income and declared dividends of $25,000 and $5,000 respectively.
▪ LEO's December 31, 2019 inventory contained an intercompany profit of $10,000.
▪ LEO's net income was $75,000.
The following took place during 2020:
▪ MARS reported a net income and declared dividends of $36,000 and $6,000 respectively.
▪ MARS' December 31, 2020 inventory contained an intercompany profit of $5,000.
▪ LEO's net income was $48,000.
Both companies are subject to a 25% tax rate. All intercompany sales as well as sales to outsiders are priced to provide the selling company with gross margin of 20%.
The amount of goodwill arising from this combination on January 1, 2019 would be:

A) $120,000.
B) $130,000.
C) $200,000.
D) $296,667.

Question 61

YIN Inc. purchased 75% of the voting shares of YANG Inc for $500,000 on July 1, 2017. On that date, YANG Inc.'s Common Shares and Retained Earnings were valued at $200,000 and $100,000 respectively. Unless otherwise stated, assume that YIN uses the cost method to account for its investment in YANG Inc.
YANG's fair values approximated its carrying values with the following exception:
YANG's bonds payable had a fair value which was $50,000 higher than their carrying value.
The bonds payable mature on July 1, 2027. Both companies use straight line amortization exclusively.
The Financial Statements of both companies for the Year ended June 30, 2020 are shown below:
Income Statements
Retained Earnings Statements
Other Information:
During August of 2018, YIN sold $60,000 worth of Inventory to YANG, 80% of which was sold to outsiders during the year. During October of 2019, YIN sold inventory to YANG for $90,000 of which two-thirds of this inventory was resold by YANG to outside parties later that year.
During September of 2018, YANG sold $90,000 worth of inventory to YIN, 50% of which was sold to outsiders during the year. During April of 2020, Yang sold inventory to YIN for $120,000. 80% of this inventory was resold by YANG to outside parties in May.
During May of 2020, YANG sold a plot of Land to YIN for $40,000. The land was recorded at cost of $24,000 on YANG's books prior to the sale. YIN has not yet sold the land.
All intercompany sales as well as sales to outsiders are priced 50% above cost. The effective tax rate for both companies is 40%.
Prepare YIN's Consolidated Income Statement for the Year ended June 30, 2020. Show the allocation of the consolidated net income between the controlling and non-controlling interests.

Question 62

YIN Inc. purchased 75% of the voting shares of YANG Inc for $500,000 on July 1, 2017. On that date, YANG Inc.'s Common Shares and Retained Earnings were valued at $200,000 and $100,000 respectively. Unless otherwise stated, assume that YIN uses the cost method to account for its investment in YANG Inc.
YANG's fair values approximated its carrying values with the following exception:
YANG's bonds payable had a fair value which was $50,000 higher than their carrying value.
The bonds payable mature on July 1, 2027. Both companies use straight line amortization exclusively.
The Financial Statements of both companies for the Year ended June 30, 2020 are shown below:
Income Statements
Retained Earnings Statements
Other Information:
During August of 2018, YIN sold $60,000 worth of Inventory to YANG, 80% of which was sold to outsiders during the year. During October of 2019, YIN sold inventory to YANG for $90,000 of which two-thirds of this inventory was resold by YANG to outside parties later that year.
During September of 2018, YANG sold $90,000 worth of inventory to YIN, 50% of which was sold to outsiders during the year. During April of 2020, Yang sold inventory to YIN for $120,000. 80% of this inventory was resold by YANG to outside parties in May.
During May of 2020, YANG sold a plot of Land to YIN for $40,000. The land was recorded at cost of $24,000 on YANG's books prior to the sale. YIN has not yet sold the land.
All intercompany sales as well as sales to outsiders are priced 50% above cost. The effective tax rate for both companies is 40%.
Calculate the non-controlling interest (Balance Sheet) as at June 30, 2020.

Question 63

YIN Inc. purchased 75% of the voting shares of YANG Inc for $500,000 on July 1, 2017. On that date, YANG Inc.'s Common Shares and Retained Earnings were valued at $200,000 and $100,000 respectively. Unless otherwise stated, assume that YIN uses the cost method to account for its investment in YANG Inc.
YANG's fair values approximated its carrying values with the following exception:
YANG's bonds payable had a fair value which was $50,000 higher than their carrying value.
The bonds payable mature on July 1, 2027. Both companies use straight line amortization exclusively.
The Financial Statements of both companies for the Year ended June 30, 2020 are shown below:
Income Statements
Retained Earnings Statements
Other Information:
During August of 2018, YIN sold $60,000 worth of Inventory to YANG, 80% of which was sold to outsiders during the year. During October of 2019, YIN sold inventory to YANG for $90,000 of which two-thirds of this inventory was resold by YANG to outside parties later that year.
During September of 2018, YANG sold $90,000 worth of inventory to YIN, 50% of which was sold to outsiders during the year. During April of 2020, Yang sold inventory to YIN for $120,000. 80% of this inventory was resold by YANG to outside parties in May.
During May of 2020, YANG sold a plot of Land to YIN for $40,000. The land was recorded at cost of $24,000 on YANG's books prior to the sale. YIN has not yet sold the land.
All intercompany sales as well as sales to outsiders are priced 50% above cost. The effective tax rate for both companies is 40%.
Assuming that YIN Inc uses the equity method to account for its investment in YANG, compute the balance in its investment in YANG account at June 30, 2020.

Question 64

YIN Inc. purchased 75% of the voting shares of YANG Inc for $500,000 on July 1, 2017. On that date, YANG Inc.'s Common Shares and Retained Earnings were valued at $200,000 and $100,000 respectively. Unless otherwise stated, assume that YIN uses the cost method to account for its investment in YANG Inc.
YANG's fair values approximated its carrying values with the following exception:
YANG's bonds payable had a fair value which was $50,000 higher than their carrying value.
The bonds payable mature on July 1, 2027. Both companies use straight line amortization exclusively.
The Financial Statements of both companies for the Year ended June 30, 2020 are shown below:
Income Statements
Retained Earnings Statements
Other Information:
During August of 2018, YIN sold $60,000 worth of Inventory to YANG, 80% of which was sold to outsiders during the year. During October of 2019, YIN sold inventory to YANG for $90,000 of which two-thirds of this inventory was resold by YANG to outside parties later that year.
During September of 2018, YANG sold $90,000 worth of inventory to YIN, 50% of which was sold to outsiders during the year. During April of 2020, Yang sold inventory to YIN for $120,000. 80% of this inventory was resold by YANG to outside parties in May.
During May of 2020, YANG sold a plot of Land to YIN for $40,000. The land was recorded at cost of $24,000 on YANG's books prior to the sale. YIN has not yet sold the land.
All intercompany sales as well as sales to outsiders are priced 50% above cost. The effective tax rate for both companies is 40%.
Calculate Consolidated Retained Earnings as at June 30, 2020.