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?

Question

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?

Quizplus · Accepted Answer

The amount of other revenue appearing on Kho Inc.'s consolidated income statement for the year ended December 31, 2020, would be $385,000. This is because the $300,000 of other revenues reported by Kho Inc. and the $160,000 reported by Lan Inc. would be combined, but the $30,000 management fee Lan paid to Kho would be eliminated in consolidation as it is an intercompany transaction, resulting in $300,000 + $160,000 - $30,000 = $430,000 - $30,000 = $400,000. However, there seems to be a discrepancy in the calculation based on the provided information. Given the details, the correct approach to calculate the consolidated other revenue should consider the elimination of the intercompany transaction. The initial calculation provided was incorrect; the correct calculation should not subtract the $30,000 twice. Therefore, the correct answer should be based on the information given, which leads to a direct sum of Kho's and Lan's other revenues without further adjustments for the management fee beyond the initial elimination. This indicates a mistake in the explanation provided. Given the figures, the correct calculation for other revenues in the consolidated income statement should directly add Kho's and Lan's other revenues without double-counting the elimination of the intercompany fee.

Kho Inc Purchased 90% of the Voting Shares of Lan Inc