Modern Advanced Accounting in Canada 9th Edition By Darrell Herauf - Test Bank

Modern Advanced Accounting in Canada 9th Edition By Darrell Herauf – Test Bank

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Sample Questions Are Posted Below

Chapter 06

Intercompany Inventory and Land Profits

Multiple Choice Questions

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.

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Learning Objective: 06-02 Prepare consolidated financial statements that reflect the elimination and subsequent realization of upstream and downstream intercompany profits in inventory.
Topic: 06-05 Intercompany Rentals

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.

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Learning Objective: 06-01 Describe the effect on consolidated profit of the elimination of intercompany revenues and expenses.
Topic: 06-01 Intercompany Revenue and Expenses

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.

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Learning Objective: 06-01 Describe the effect on consolidted profit of the elimination of intercompany revenues and expenses.
Topic: 06-01 Intercompany Revenue and Expenses

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.

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Medium
Learning Objective: 06-02 Prepare consolidated financial statements that reflect the elimination and subsequent realization of upstream and downstream intercompany profits in inventory.
Topic: 06-06 Intercompany Profits in Assets

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

	before tax	40% tax	after tax
Inventory sales (X “parent” selling)	$10,000
gross profit percentage	× 20%
gross profit on intercompany sale of inventory (X selling)	$2,000
Realized (50%)	$1,000	$400	$600
Unrealized (50%)	$1,000	$400	$600

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

	before tax	40% tax	after tax
Inventory sales (X “parent” selling)	$10,000
gross profit percentage	× 20%
gross profit on intercompany sale of inventory (X selling)	$2,000
Realized (50%)	$1,000	$400	$600
Unrealized (50%)	$1,000	$400	$600

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

	before tax	40% tax	after tax
Inventory sales (Y “sub” selling)	$5,000
gross profit percentage	× 20%
gross profit on intercompany sale of inventory (Y selling)	$1,000
Realized (60%)	$600	$240	$360
Unrealized (40%)	$400	$160	$240

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

	before tax	40% tax	after tax
Inventory sales (Y “sub” selling)	$5,000
gross profit percentage	× 20%
gross profit on intercompany sale of inventory (Y selling)	$1,000
Realized (60%)	$600	$240	$360
Unrealized (40%)	$400	$160	$240

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.

	before tax	40% tax	after tax
Inventory sales (Y “sub” selling)	$5,000
gross profit percentage	× 20%
gross profit on intercompany sale of inventory (Y selling)	$1,000
Realized (60%)	$600	$240	$360
Unrealized (40%)	$400	$160	$240

Decrease in NCI account = $48 = $240 unrealized after-tax profit ´ 20% NCI ownership.

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.

	Debit	Credit
Cost of Goods Sold	$1,400
Inventory		$1,400

	Debit	Credit
Sales	$15,000
Cost of Goods Sold		$15,000

	Debit	Credit
Sales	$15,000
Cost of Goods Sold		$12,000
Inventory		$3,000

	Debit	Credit
Cost of Goods Sold	$400
Inventory		$400

Before tax unrealized profits (X “parent” selling) = $1,000. Before tax unrealized profits (Y “sub” selling) = $400. Total = $1,400 = $1,000 + $400.

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.

	before tax	40% tax	after tax
Inventory sales (Y “sub” selling)	$5,000
gross profit percentage	× 20%
gross profit on intercompany sale of inventory (Y selling)	$1,000
Realized (60%)	$600	$240	$360
Unrealized (40%)	$400	$160	$240

Decrease in investment account = $192 = $240 unrealized after-tax profit ´ 80% Controlling Interest ownership.

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Medium
Learning Objective: 06-04 Prepare consolidated financial statements that reflect the elimination and subsequent realizations of upstream and downstream intercompany profits in land.
Topic: 06-08 Intercompany Inventory Profits: Subsidiary Selling (Upstream Transactions)
Topic: 06-10 Equity Method Journal Entries
Topic: 06-13 Intercompany Inventory Profits: Parent Selling (Downstream Transactions)

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

	before tax	40% tax	after tax
Inventory sales (Y “sub” selling)	$5,000
gross profit percentage	× 20%
gross profit on intercompany sale of inventory (Y selling)	$1,000
Realized (60%)	$600	$240	$360

Unrealized (40%)	$400	$160	$240
Profit of Y “sub” as reported		$20,000
Less: Ending inventory profit (after-tax unrealized amount)		$240
Adjusted profit		$19,760

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.

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Learning Objective: 06-05 Prepare the journal entries under the equity method to reflect the elimination and subsequent realization of intercompany profits in inventory and land.
Topic: 06-18 Intercompany Land Profit Holdback
Topic: 06-19 Realization of Intercompany Land Profits

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

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.

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

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

	Kho Inc.	Lan Inc.
Sales	$700,000	$640,000
Other Revenues	$300,000	$160,000
Less: Expenses:
Cost of Goods Sold	$280,000	$256,000
Depreciation Expense	$30,000	$14,000
Other Expenses	$240,000	$155,000
Income Tax Expense	$90,000	$75,000
Net Income	$360,000	$300,000

Retained Earnings Statements

	Kho Inc.	Lan Inc.
Balance, January 1, 2020	$200,000	$100,000
Net Income	$360,000	$300,000
Less: Dividends	($60,000)	($50,000)
Retained Earnings, Dec 31, 2020	$500,000	$350,000
Balance Sheets
	Kho Inc.	Lan Inc.
Cash	$200,000	$150,000
Accounts Receivable	$50,000	$150,000
Inventory	$50,000	$150,000
Investment in Lan Inc.	$600,000
Equipment (net)	$500,000	$150,000
Trademark		$200,000
Total Assets	$1,400,000	$800,000
Current Liabilities	$280,000	$150,000
Bonds Payable	$120,000	$100,000
Common Shares	$500,000	$200,000
Retained Earnings	$500,000	$350,000
Total Liabilities and Equity	$1,400,000	$800,000

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

Calculation and allocation of acquisition differential:

Acquisition cost for 90%		$600,000
Implied acquisition cost for 100%	($600,000/0.90)	$666,667
Less: Carrying value of net identifiable assets of subsidiary	($200,000 common shares + $250,000 retained earnings)	$450,000
Acquisition differential		$216,667
Allocation:	(FV–CV)
Trademark	+ 50,000
Bonds Payable	– 20,000	30,000
Goodwill		$186,667

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

	Kho Inc.	Lan Inc.
Sales	$700,000	$640,000
Other Revenues	$300,000	$160,000
Less: Expenses:
Cost of Goods Sold	$280,000	$256,000
Depreciation Expense	$30,000	$14,000
Other Expenses	$240,000	$155,000
Income Tax Expense	$90,000	$75,000
Net Income	$360,000	$300,000

Retained Earnings Statements

	Kho Inc.	Lan Inc.
Balance, January 1, 2020	$200,000	$100,000
Net Income	$360,000	$300,000
Less: Dividends	($60,000)	($50,000)
Retained Earnings, Dec 31, 2020	$500,000	$350,000
Balance Sheets
	Kho Inc.	Lan Inc.
Cash	$200,000	$150,000
Accounts Receivable	$50,000	$150,000
Inventory	$50,000	$150,000
Investment in Lan Inc.	$600,000
Equipment (net)	$500,000	$150,000
Trademark		$200,000
Total Assets	$1,400,000	$800,000
Current Liabilities	$280,000	$150,000
Bonds Payable	$120,000	$100,000
Common Shares	$500,000	$200,000
Retained Earnings	$500,000	$350,000
Total Liabilities and Equity	$1,400,000	$800,000

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.

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.

	Debit	Credit
Cash	$50,000
Investment in Lan		$50,000

	Debit	Credit
Cash	$45,000
Acquisition Differential		$45,000

	Debit	Credit
Cash	$45,000
Dividend Income		$45,000

	Debit	Credit
Cash	$50,000
Goodwill		$50,000

Kho Inc. (parent) share of Lan Inc. (sub) dividends paid = $45,000 = $50,000 ´ 90%. Note that the cost method is used by Kho Inc.

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

	Kho Inc.	Lan Inc.
Sales	$700,000	$640,000
Other Revenues	$300,000	$160,000
Less: Expenses:
Cost of Goods Sold	$280,000	$256,000
Depreciation Expense	$30,000	$14,000
Other Expenses	$240,000	$155,000
Income Tax Expense	$90,000	$75,000
Net Income	$360,000	$300,000

Retained Earnings Statements

	Kho Inc.	Lan Inc.
Balance, January 1, 2020	$200,000	$100,000
Net Income	$360,000	$300,000
Less: Dividends	($60,000)	($50,000)
Retained Earnings, Dec 31, 2020	$500,000	$350,000
Balance Sheets
	Kho Inc.	Lan Inc.
Cash	$200,000	$150,000
Accounts Receivable	$50,000	$150,000
Inventory	$50,000	$150,000
Investment in Lan Inc.	$600,000
Equipment (net)	$500,000	$150,000
Trademark		$200,000
Total Assets	$1,400,000	$800,000
Current Liabilities	$280,000	$150,000
Bonds Payable	$120,000	$100,000
Common Shares	$500,000	$200,000
Retained Earnings	$500,000	$350,000
Total Liabilities and Equity	$1,400,000	$800,000

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.

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

Sales Revenue on consolidated income statement = $1,210,000 ($700,000 + $640,000 – $90,000 – $40,000).

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

	Kho Inc.	Lan Inc.
Sales	$700,000	$640,000
Other Revenues	$300,000	$160,000
Less: Expenses:
Cost of Goods Sold	$280,000	$256,000
Depreciation Expense	$30,000	$14,000
Other Expenses	$240,000	$155,000
Income Tax Expense	$90,000	$75,000
Net Income	$360,000	$300,000

Retained Earnings Statements

	Kho Inc.	Lan Inc.
Balance, January 1, 2020	$200,000	$100,000
Net Income	$360,000	$300,000
Less: Dividends	($60,000)	($50,000)
Retained Earnings, Dec 31, 2020	$500,000	$350,000
Balance Sheets
	Kho Inc.	Lan Inc.
Cash	$200,000	$150,000
Accounts Receivable	$50,000	$150,000
Inventory	$50,000	$150,000
Investment in Lan Inc.	$600,000
Equipment (net)	$500,000	$150,000
Trademark		$200,000
Total Assets	$1,400,000	$800,000
Current Liabilities	$280,000	$150,000
Bonds Payable	$120,000	$100,000
Common Shares	$500,000	$200,000
Retained Earnings	$500,000	$350,000
Total Liabilities and Equity	$1,400,000	$800,000

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

Other Revenue on consolidated income statement = $415,000.

Kho (parent) other revenue		$300,000
Lan (sub) other revenue		$160,000
Less: intercompany management fees		$(30,000)
Less: Kho (parent) portion of dividends reported in income (since cost method used)	($50,000 × 90%)	$(45,000)
Consolidated other revenue		$385,000

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

	Kho Inc.	Lan Inc.
Sales	$700,000	$640,000
Other Revenues	$300,000	$160,000
Less: Expenses:
Cost of Goods Sold	$280,000	$256,000
Depreciation Expense	$30,000	$14,000
Other Expenses	$240,000	$155,000
Income Tax Expense	$90,000	$75,000
Net Income	$360,000	$300,000

Retained Earnings Statements

	Kho Inc.	Lan Inc.
Balance, January 1, 2020	$200,000	$100,000
Net Income	$360,000	$300,000
Less: Dividends	($60,000)	($50,000)
Retained Earnings, Dec 31, 2020	$500,000	$350,000
Balance Sheets
	Kho Inc.	Lan Inc.
Cash	$200,000	$150,000
Accounts Receivable	$50,000	$150,000
Inventory	$50,000	$150,000
Investment in Lan Inc.	$600,000
Equipment (net)	$500,000	$150,000
Trademark		$200,000
Total Assets	$1,400,000	$800,000
Current Liabilities	$280,000	$150,000
Bonds Payable	$120,000	$100,000
Common Shares	$500,000	$200,000
Retained Earnings	$500,000	$350,000
Total Liabilities and Equity	$1,400,000	$800,000

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.

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.

Pre-tax profits from 2019 sales realized in 2019 = $9,800.

EI 2019 (Kho “parent” selling)	($50,000 × 20% gross profit × 50% realized during year)	$5,000
EI 2019 (Lan “sub” selling)	($30,000 × 20% gross profit × 80% realized during year)	$4,800
		$9,800

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

	Kho Inc.	Lan Inc.
Sales	$700,000	$640,000
Other Revenues	$300,000	$160,000
Less: Expenses:
Cost of Goods Sold	$280,000	$256,000
Depreciation Expense	$30,000	$14,000
Other Expenses	$240,000	$155,000
Income Tax Expense	$90,000	$75,000
Net Income	$360,000	$300,000

Retained Earnings Statements

	Kho Inc.	Lan Inc.
Balance, January 1, 2020	$200,000	$100,000
Net Income	$360,000	$300,000
Less: Dividends	($60,000)	($50,000)
Retained Earnings, Dec 31, 2020	$500,000	$350,000
Balance Sheets
	Kho Inc.	Lan Inc.
Cash	$200,000	$150,000
Accounts Receivable	$50,000	$150,000
Inventory	$50,000	$150,000
Investment in Lan Inc.	$600,000
Equipment (net)	$500,000	$150,000
Trademark		$200,000
Total Assets	$1,400,000	$800,000
Current Liabilities	$280,000	$150,000
Bonds Payable	$120,000	$100,000
Common Shares	$500,000	$200,000
Retained Earnings	$500,000	$350,000
Total Liabilities and Equity	$1,400,000	$800,000

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.

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

Unrealized profits in beginning inventory = $6,200.

BI 2020 (Kho “parent” selling)	($50,000 × 20% gross profit × 50% unrealized during year)	$5,000
BI 2020 (Lan “sub” selling)	($30,000 × 20% gross profit × 20% unrealized during year)	$1,200
		$6,200

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

	Kho Inc.	Lan Inc.
Sales	$700,000	$640,000
Other Revenues	$300,000	$160,000
Less: Expenses:
Cost of Goods Sold	$280,000	$256,000
Depreciation Expense	$30,000	$14,000
Other Expenses	$240,000	$155,000
Income Tax Expense	$90,000	$75,000
Net Income	$360,000	$300,000

Retained Earnings Statements

	Kho Inc.	Lan Inc.
Balance, January 1, 2020	$200,000	$100,000
Net Income	$360,000	$300,000
Less: Dividends	($60,000)	($50,000)
Retained Earnings, Dec 31, 2020	$500,000	$350,000
Balance Sheets
	Kho Inc.	Lan Inc.
Cash	$200,000	$150,000
Accounts Receivable	$50,000	$150,000
Inventory	$50,000	$150,000
Investment in Lan Inc.	$600,000
Equipment (net)	$500,000	$150,000
Trademark		$200,000
Total Assets	$1,400,000	$800,000
Current Liabilities	$280,000	$150,000
Bonds Payable	$120,000	$100,000
Common Shares	$500,000	$200,000
Retained Earnings	$500,000	$350,000
Total Liabilities and Equity	$1,400,000	$800,000

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.

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

Unrealized profits in ending inventory = $8,000.

EI 2020 (Kho “parent” selling)	($90,000 × 20% gross profit × 1/3 unrealized)	$6,000
EI 2020 (Lan “sub” selling)	($40,000 × 20% gross profit × 25% unrealized)	$2,000
		$8,000

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

	Kho Inc.	Lan Inc.
Sales	$700,000	$640,000
Other Revenues	$300,000	$160,000
Less: Expenses:
Cost of Goods Sold	$280,000	$256,000
Depreciation Expense	$30,000	$14,000
Other Expenses	$240,000	$155,000
Income Tax Expense	$90,000	$75,000
Net Income	$360,000	$300,000

Retained Earnings Statements

	Kho Inc.	Lan Inc.
Balance, January 1, 2020	$200,000	$100,000
Net Income	$360,000	$300,000
Less: Dividends	($60,000)	($50,000)
Retained Earnings, Dec 31, 2020	$500,000	$350,000
Balance Sheets
	Kho Inc.	Lan Inc.
Cash	$200,000	$150,000
Accounts Receivable	$50,000	$150,000
Inventory	$50,000	$150,000
Investment in Lan Inc.	$600,000
Equipment (net)	$500,000	$150,000
Trademark		$200,000
Total Assets	$1,400,000	$800,000
Current Liabilities	$280,000	$150,000
Bonds Payable	$120,000	$100,000
Common Shares	$500,000	$200,000
Retained Earnings	$500,000	$350,000
Total Liabilities and Equity	$1,400,000	$800,000

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.

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.

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

	Kho Inc.	Lan Inc.
Sales	$700,000	$640,000
Other Revenues	$300,000	$160,000
Less: Expenses:
Cost of Goods Sold	$280,000	$256,000
Depreciation Expense	$30,000	$14,000
Other Expenses	$240,000	$155,000
Income Tax Expense	$90,000	$75,000
Net Income	$360,000	$300,000

Retained Earnings Statements

	Kho Inc.	Lan Inc.
Balance, January 1, 2020	$200,000	$100,000
Net Income	$360,000	$300,000
Less: Dividends	($60,000)	($50,000)
Retained Earnings, Dec 31, 2020	$500,000	$350,000
Balance Sheets
	Kho Inc.	Lan Inc.
Cash	$200,000	$150,000
Accounts Receivable	$50,000	$150,000
Inventory	$50,000	$150,000
Investment in Lan Inc.	$600,000
Equipment (net)	$500,000	$150,000
Trademark		$200,000
Total Assets	$1,400,000	$800,000
Current Liabilities	$280,000	$150,000
Bonds Payable	$120,000	$100,000
Common Shares	$500,000	$200,000
Retained Earnings	$500,000	$350,000
Total Liabilities and Equity	$1,400,000	$800,000

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.

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

2020 changes to the acquisition differential (excluding goodwill impairment) on the consolidated income statement = $3,000.

Trademark	($50,000/10 years)	$5,000
Bonds payable	($20,000/10 years)	$(2,000)
Goodwill		n/a – exclude
		$3,000

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

	Kho Inc.	Lan Inc.
Sales	$700,000	$640,000
Other Revenues	$300,000	$160,000
Less: Expenses:
Cost of Goods Sold	$280,000	$256,000
Depreciation Expense	$30,000	$14,000
Other Expenses	$240,000	$155,000
Income Tax Expense	$90,000	$75,000
Net Income	$360,000	$300,000

Retained Earnings Statements

	Kho Inc.	Lan Inc.
Balance, January 1, 2020	$200,000	$100,000
Net Income	$360,000	$300,000
Less: Dividends	($60,000)	($50,000)
Retained Earnings, Dec 31, 2020	$500,000	$350,000
Balance Sheets
	Kho Inc.	Lan Inc.
Cash	$200,000	$150,000
Accounts Receivable	$50,000	$150,000
Inventory	$50,000	$150,000
Investment in Lan Inc.	$600,000
Equipment (net)	$500,000	$150,000
Trademark		$200,000
Total Assets	$1,400,000	$800,000
Current Liabilities	$280,000	$150,000
Bonds Payable	$120,000	$100,000
Common Shares	$500,000	$200,000
Retained Earnings	$500,000	$350,000
Total Liabilities and Equity	$1,400,000	$800,000

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.

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.

Unrealized profits in beginning inventory ($6,200) will be realized in 2020, therefore, income tax expense will increase:

BI 2020 (Kho “parent” selling)	($50,000 × 20% gross profit × 50% unrealized during year)	$5,000
BI 2020 (Lan “sub” selling)	($30,000 × 20% gross profit × 20% unrealized during year)	$1,200
		$6,200
Increase in income tax expense (tax rate = 20%)	6,200 × 20%	$1,240

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

	Kho Inc.	Lan Inc.
Sales	$700,000	$640,000
Other Revenues	$300,000	$160,000
Less: Expenses:
Cost of Goods Sold	$280,000	$256,000
Depreciation Expense	$30,000	$14,000
Other Expenses	$240,000	$155,000
Income Tax Expense	$90,000	$75,000
Net Income	$360,000	$300,000

Retained Earnings Statements

	Kho Inc.	Lan Inc.
Balance, January 1, 2020	$200,000	$100,000
Net Income	$360,000	$300,000
Less: Dividends	($60,000)	($50,000)
Retained Earnings, Dec 31, 2020	$500,000	$350,000
Balance Sheets
	Kho Inc.	Lan Inc.
Cash	$200,000	$150,000
Accounts Receivable	$50,000	$150,000
Inventory	$50,000	$150,000
Investment in Lan Inc.	$600,000
Equipment (net)	$500,000	$150,000
Trademark		$200,000
Total Assets	$1,400,000	$800,000
Current Liabilities	$280,000	$150,000
Bonds Payable	$120,000	$100,000
Common Shares	$500,000	$200,000
Retained Earnings	$500,000	$350,000
Total Liabilities and Equity	$1,400,000	$800,000

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.

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.

Income tax expense would decrease due to the unrealized profits in ending inventory of $8,000.

EI 2018 (Kho “parent” selling)	($90,000 × 20% gross profit × 1/3 unrealized)	$6,000
EI 2018 (Lan “sub” selling)	($40,000 × 20% gross profit × 25% unrealized)	$2,000
		$8,000
Reduction to income tax expense (tax rate = 20%)	$8,000 × 20%	$1,600

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

	Kho Inc.	Lan Inc.
Sales	$700,000	$640,000
Other Revenues	$300,000	$160,000
Less: Expenses:
Cost of Goods Sold	$280,000	$256,000
Depreciation Expense	$30,000	$14,000
Other Expenses	$240,000	$155,000
Income Tax Expense	$90,000	$75,000
Net Income	$360,000	$300,000

Retained Earnings Statements

	Kho Inc.	Lan Inc.
Balance, January 1, 2020	$200,000	$100,000
Net Income	$360,000	$300,000
Less: Dividends	($60,000)	($50,000)
Retained Earnings, Dec 31, 2020	$500,000	$350,000
Balance Sheets
	Kho Inc.	Lan Inc.
Cash	$200,000	$150,000
Accounts Receivable	$50,000	$150,000
Inventory	$50,000	$150,000
Investment in Lan Inc.	$600,000
Equipment (net)	$500,000	$150,000
Trademark		$200,000
Total Assets	$1,400,000	$800,000
Current Liabilities	$280,000	$150,000
Bonds Payable	$120,000	$100,000
Common Shares	$500,000	$200,000
Retained Earnings	$500,000	$350,000
Total Liabilities and Equity	$1,400,000	$800,000

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.

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

Calculation and allocation of acquisition differential:

Acquisition cost for 90%		$600,000
Implied acquisition cost for 100%	($600,000/0.90)	$666,667
Less: Carrying value of net identifiable assets of subsidiary	($200,000 common shares + $250,000 retained earnings)	$450,000
Acquisition differential		$216,667
Allocation:	(FV–CV)
Trademark		$50,000
Bonds Payable		$(20,000)
Balance-Goodwill		$186,667

NCI at date of acquisition = $66,667 = $666,667 ´ 10%.

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

	Kho Inc.	Lan Inc.
Sales	$700,000	$640,000
Other Revenues	$300,000	$160,000
Less: Expenses:
Cost of Goods Sold	$280,000	$256,000
Depreciation Expense	$30,000	$14,000
Other Expenses	$240,000	$155,000
Income Tax Expense	$90,000	$75,000
Net Income	$360,000	$300,000

Retained Earnings Statements

	Kho Inc.	Lan Inc.
Balance, January 1, 2020	$200,000	$100,000
Net Income	$360,000	$300,000
Less: Dividends	($60,000)	($50,000)
Retained Earnings, Dec 31, 2020	$500,000	$350,000
Balance Sheets
	Kho Inc.	Lan Inc.
Cash	$200,000	$150,000
Accounts Receivable	$50,000	$150,000
Inventory	$50,000	$150,000
Investment in Lan Inc.	$600,000
Equipment (net)	$500,000	$150,000
Trademark		$200,000
Total Assets	$1,400,000	$800,000
Current Liabilities	$280,000	$150,000
Bonds Payable	$120,000	$100,000
Common Shares	$500,000	$200,000
Retained Earnings	$500,000	$350,000
Total Liabilities and Equity	$1,400,000	$800,000

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.

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

NBV of Lan at December 31, 2020 ($200,000 + $350,000)	$550,000
Less: unrealized after-tax profit in ending inventory (upstream) ($40,000 × 20%) × 25% = $2,000 × 80% =	(1,600)
Add: unamortized AD	200,667
	$749,067
NCI percentage interest	10%
	$74,907

	Balance at Acquisition	Changes in 2019	Changes in 2020	Balance at Dec. 31/20
Trademark	$50,000	$5,000	$5,000	$40,000
Bonds payable	$(20,000)	$(2,000)	$(2,000)	$(16,000)
Goodwill	$186,667	———-	$10,000	$176,667
				$200,667

Accessibility: Keyboard Navigation
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Learning Objective: 06-02 Prepare consolidated financial statements that reflect the elimination and subsequent realization of upstream and downstream intercompany profits in inventory.
Topic: 06-01 Intercompany Revenue and Expenses

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

	Kho Inc.	Lan Inc.
Sales	$700,000	$640,000
Other Revenues	$300,000	$160,000
Less: Expenses:
Cost of Goods Sold	$280,000	$256,000
Depreciation Expense	$30,000	$14,000
Other Expenses	$240,000	$155,000
Income Tax Expense	$90,000	$75,000
Net Income	$360,000	$300,000

Retained Earnings Statements

	Kho Inc.	Lan Inc.
Balance, January 1, 2020	$200,000	$100,000
Net Income	$360,000	$300,000
Less: Dividends	($60,000)	($50,000)
Retained Earnings, Dec 31, 2020	$500,000	$350,000
Balance Sheets
	Kho Inc.	Lan Inc.
Cash	$200,000	$150,000
Accounts Receivable	$50,000	$150,000
Inventory	$50,000	$150,000
Investment in Lan Inc.	$600,000
Equipment (net)	$500,000	$150,000
Trademark		$200,000
Total Assets	$1,400,000	$800,000
Current Liabilities	$280,000	$150,000
Bonds Payable	$120,000	$100,000
Common Shares	$500,000	$200,000
Retained Earnings	$500,000	$350,000
Total Liabilities and Equity	$1,400,000	$800,000

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.

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

Trademark on consolidated balance sheet = $200,000 + $40,000 = $240,000.

Changes to Acquisition Differential Schedule

	Balance at Acquisition	Changes in 2019	Changes in 2020	Balance at Dec. 31/20
Trademark	$50,000	$5,000	$5,000	$40,000
Bonds payable	$(20,000)	$(2,000)	$(2,000)	$(16,000)
Goodwill	$186,667	———-	$10,000	$176,667
				$200,667

Accessibility: Keyboard Navigation
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Difficulty: Easy
Learning Objective: 06-02 Prepare consolidated financial statements that reflect the elimination and subsequent realization of upstream and downstream intercompany profits in inventory.
Topic: 06-01 Intercompany Revenue and Expenses

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

	Kho Inc.	Lan Inc.
Sales	$700,000	$640,000
Other Revenues	$300,000	$160,000
Less: Expenses:
Cost of Goods Sold	$280,000	$256,000
Depreciation Expense	$30,000	$14,000
Other Expenses	$240,000	$155,000
Income Tax Expense	$90,000	$75,000
Net Income	$360,000	$300,000

Retained Earnings Statements

	Kho Inc.	Lan Inc.
Balance, January 1, 2020	$200,000	$100,000
Net Income	$360,000	$300,000
Less: Dividends	($60,000)	($50,000)
Retained Earnings, Dec 31, 2020	$500,000	$350,000
Balance Sheets
	Kho Inc.	Lan Inc.
Cash	$200,000	$150,000
Accounts Receivable	$50,000	$150,000
Inventory	$50,000	$150,000
Investment in Lan Inc.	$600,000
Equipment (net)	$500,000	$150,000
Trademark		$200,000
Total Assets	$1,400,000	$800,000
Current Liabilities	$280,000	$150,000
Bonds Payable	$120,000	$100,000
Common Shares	$500,000	$200,000
Retained Earnings	$500,000	$350,000
Total Liabilities and Equity	$1,400,000	$800,000

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.

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

Current liabilities on consolidated balance sheet = $410,000.

Kho (parent) Current liabilities	$280,000
Lan (sub) Current liabilities	$150,000
Less: intercompany payable	$20,000
Consolidated Current liabilities	$410,000

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. $120,000

Changes to acquisition differential on consolidated income statement 2019 = $82,000.

Changes to Acquisition Differential Schedule

	Balance Jan. 1, 2019	Changes in 2019	Balance Dec. 31, 2019	Changes in 2020	Balance Dec. 31, 2020
Inventory	$80,000	$(80,000)	$0	$0	$0
Equipment (net) (20 years)	$40,000	$(2,000)	$38,000	$(2,000)	$36,000
Goodwill	$296,667		$296,667		$296,667
	$416,667	$(82,000)	$334,667	$(2,000)	$332,667

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

Changes to acquisition differential on consolidated income statement 2020 = $2,000.

Changes to Acquisition Differential Schedule

	Balance Jan. 1, 2019	Changes in 2019	Balance Dec. 31, 2019	Changes in 2020	Balance Dec. 31, 2020
Inventory	$80,000	$(80,000)	$0	$0	$0
Equipment (net) (20 years)	$40,000	$(2,000)	$38,000	$(2,000)	$36,000
Goodwill	$296,667		$296,667		$296,667
	$416,667	$(82,000)	$334,667	$(2,000)	$332,667

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

Change to Investment Account in 2019:

Net income – Mars	$25,000
Less: unrealized profit in ending inventory ($10,000 before tax × (1 – 25% tax rate)	(7,500)
Less: changes in AD-2019	(82,000)
	$(64,500)
LEO’s % interest	60%
	$(38,700)
Less: dividends (5,000 × 60%)	(3,000)
Change to investment account in 2019	$(41,700)

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

Change to Investment Account in 2020:

Net income – Mars	$36,000
Less: changes in AD-2020	(2,000)
Add: realized profit in beginning inventory – $10,000 before tax × (1 – 25% tax rate	7,500
	$41,500
LEO’s % interest	60%
	$24,900
Less: unrealized profit in ending inventory ($5,000 before tax × (1 – 25% tax rate)	(3,750)
Less: dividends (6,000 × 60%)	(3,600)
Change to investment account in 2020	$17,550

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.

Calculation of consolidated net income 2019:

		TOTAL	Parent’s portion 60% (CI-ATP)	NCI portion 40%
Parent’s net income		$75,000
Less: dividend revenue from sub (cost method)	($5,000 × 60%)	$(3,000)
Parent’s adjusted net income		$72,000	$72,000	$0
Sub’s net income	$25,000
Less: after-tax ending inventory profit heldback (sub selling) ($10,000 before tax × (1 – 25% tax rate))	$(7,500)
Less: changes in acquisition differential	$(82,000)
Sub’s adjusted net income		$(64,500)	$(38,700)	$(25,800)
Consolidated net income		$7,500	$33,300	$(25,800)

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.

Calculation of consolidated net income 2020:

		TOTAL	Parent’s portion–60% (CI-ATP)	NCI portion 40%
Parent’s net income		$48,000
Less: dividend revenue from sub (cost method)	($6,000 × 60%)	$(3,600)
Less: after-tax ending inventory profit heldback (parent selling) ($5,000 before tax × (1 – 25% tax rate))		$(3,750)
Parent’s adjusted net income		$40,650	$40,650	$0
Sub’s net income	$36,000
Add: after-tax beginning inventory profit realized (sub selling) ($10,000 before tax × (1 – 25% tax rate))	$7,500
Less: changes in acquisition differential	$(2,000)
Sub’s adjusted net income		$41,500	$24,900	$16,600
Consolidated net income		$82,150	$65,550	$16,600

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.

Calculation of consolidated net income 2019:

		TOTAL	Parent’s portion 60% (CI-ATP)	NCI portion 40%
Parent’s net income		$75,000
Less: dividend revenue from sub (cost method)	($5,000 × 60%)	$(3,000)
Parent’s adjusted net income		$72,000	$72,000	$0
Sub’s net income	$25,000
Less: after-tax ending inventory profit heldback (sub selling) ($10,000 before tax × (1 – 25% tax rate))	$(7,500)
Less: changes in acquisition differential	$(82,000)
Sub’s adjusted net income		$(64,500)	$(38,700)	$(25,800)
Consolidated net income		$7,500	$33,300	$(25,800)

Consolidated net income attributable to NCI – $(25,800) – $2,000 [$5,000 ´ 40% (share of dividends)] = decrease to NCI = $27,800.

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 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.

Calculation of consolidated net income 2020:

		TOTAL	Parent’s portion–60% (CI-ATP)	NCI portion 40%
Parent’s net income		$48,000
Less: dividend revenue from sub (cost method)	($6,000 × 60%)	$(3,600)
Less: after-tax ending inventory profit heldback (parent selling) ($5,000 before tax × (1 – 25% tax rate))		$(3,750)
Parent’s adjusted net income		$40,650	$40,650	$0
Sub’s net income	$36,000
Add: after-tax beginning inventory profit realized (sub selling) ($10,000 before tax × (1 – 25% tax rate))	$7,500
Less: changes in acquisition differential	$(2,000)
Sub’s adjusted net income		$41,500	$24,900	$16,600
Consolidated net income		$82,150	$65,550	$16,600

Consolidated net income attributable to NCI – $16,600 – $2,400 [6,000 ´ 40% (share of dividends)] = increase to NCI = $14,200.

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

Investment in MARS Inc. account balance – December 31, 2019

NBV of MARS	$250,000 + $25,000 – $5,000	$270,000
Less: after-tax ending inventory profit heldback (sub selling)	($10,000 before tax × (1 – 25% tax rate))	(7,500)
Add: balance of acquisition differential at December 31, 2019		334,667
		$597,167
LEO Inc. ownership interest		× 60%
		$358,300

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Hard
Learning Objective: 06-04 Prepare consolidated financial statements that reflect the elimination and subsequent realizations of upstream and downstream intercompany profits in land.
Topic: 06-06 Intercompany Profits in Assets

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

Investment in MARS Inc. account balance – December 31, 2020

NBV of MARS	$250,000 + $25,000 – $5,000 + $36,000 – $6,000	$300,000
Add: balance of acquisition differential at December 31, 2020		332,667
		$632,667
LEO Inc. ownership interest		× 60%
		$379,600
Less: after-tax ending inventory profit heldback (parent selling)	($5,000 before tax × (1 – 25% tax rate))	(3,750)
		$375,850

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.

Calculation and allocation of acquisition differential:

Acquisition cost for 60%		$400,000
Implied acquisition cost for 100%	($400,000/0.60)	$666,667
Less: Carrying value of net identifiable assets of subsidiary	($100,000 common shares + $150,000 retained earnings)	$250,000
Acquisition differential		$416,667
Allocation:	(FV–CV)
Inventory	$80,000
Equipment (net)	$40,000	$120,000
Goodwill		$296,667

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.

Calculation and allocation of acquisition differential:

Acquisition cost for 60%		$400,000
Implied acquisition cost for 100%	($400,000/0.60)	$666,667
Less: Carrying value of net identifiable assets of subsidiary	($100,000 common shares + $150,000 retained earnings)	$250,000
Acquisition differential		$416,667
Allocation:	(FV–CV)
Inventory	$80,000
Equipment (net)	$40,000	$120,000
Goodwill		$296,667

NCI on consolidated balance sheet on the date of acquisition = $266,667 = $666,667 implied 100% value ´ 40% NCI ownership percentage.

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

The entire intercompany gain on the land sale will be eliminated in 2018.

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Medium
Learning Objective: 06-05 Prepare the journal entries under the equity method to reflect the elimination and subsequent realization of intercompany profits in inventory and land.
Topic: 06-18 Intercompany Land Profit Holdback
Topic: 06-19 Realization of Intercompany Land Profits

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

Heldback gain on land is now realized as the land has been sold to an unrelated third party in 2020 – $240,000 – $120,000 = $120,000

The gain recorded by the subsidiary in its books would be $275,000 – $240,000 = $35,000

Consolidated total = $35,000 + $120,000 = $155,000.

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.

Unrealized gain on land sale = $240,000 – $120,000 = $120,000 ´ 20% (income tax rate) = $24,000.

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.

Realized gain on intercompany land sale = $240,000 – $120,000 = $120,000 ´ 20% (income tax rate) = $24,000.

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.

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

$300,000 (parent) + $300,000 (subsidiary) – $120,000 (unrealized gain) = $480,000.

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

$300,000 (parent) + $340,000 (subsidiary) – $120,000 (unrealized gain) = $520,000.

Short Answer Questions

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.

2019
Profits realized during 2019	Before Tax	After Tax
Inventory Sales	$3,000	$2,250
Profits Realized from Opening Inventory $5,000 × 30% = 1,500	$1,500	$1,125
Unrealized Profits at Year-end (2019)
Inventory Sales ($20,000 × 50%) × 30% = $3,000	$3,000	$2,250
2020
Profits realized during 2020
Inventory Sales	$3,000	$2,250

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.

2019
Profits realized during 2019	Before Tax	After Tax
Inventory Sales $5,000 × 30%	$1,500	$1,125
Unrealized Profits at Year-end (2019)
Inventory Sales ($10,000 × 50%) = $5,000 × 30% = $1,500	$1,500	$1,125
2020
Profits realized during 2020
Inventory Sales	$1,500	$1,125

53. 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.

In your own words, explain what effect (if any) these intercompany transactions would have on the non-controlling interest.

The non-controlling interest is only affected by upstream transactions – that is, sales from a subsidiary to the parent. Unrealized profits serve to decrease the non-controlling interest by the non-controlling interest’s pro rata share of the after-tax upstream profits. Conversely, profits realized in a given year serve to increase the non-controlling interest by the non-controlling interest’s pro rata share of the after-tax upstream profits.

In 2019, there will be both a realized profit in beginning inventory and an unrealized profit in ending inventory from the upstream transactions; this will increase the non-controlling interest in income by 30% of the after-tax realized profit, i.e., 30% of $1,125 or $338 and decrease the non-controlling interest in income by 30% of the after-tax unrealized profit, i.e., 30% of $1,125 or $338. The overall effect on the non-controlling interest account on the consolidated balance sheet for 2019 will be nil.

The unrealized upstream profits in inventory at the end of 2019 will have been realized during 2020, thus increasing the non-controlling interest in income and the non-controlling interest balance sheet account by $338 (i.e. $1,125 ´ 30%).

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Medium
Learning Objective: 06-02 Prepare consolidated financial statements that reflect the elimination and subsequent realization of upstream and downstream intercompany profits in inventory.
Topic: 06-07 Upstream Versus Downstream Transactions
Topic: 06-08 Intercompany Inventory Profits: Subsidiary Selling (Upstream Transactions)
Topic: 06-09 Holdback of Inventory Profits-Year 4
Topic: 06-11 Realization of Inventory Profits-Year 5
Topic: 06-13 Intercompany Inventory Profits: Parent Selling (Downstream Transactions)
Topic: 06-23 Analysis and Interpretation of Financial Statements

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

	MAX Inc.	MIN Inc.
Sales	$640,000	$520,000
Other Revenues	$360,000	$160,000
Less: Expenses
Cost of Goods Sold	$480,000	$390,000
Depreciation Expense	$40,000	$20,000
Other Expenses	$80,000	$40,000
Income Tax Expense	$250,000	$115,000
Net Income	$250,000	$115,000

Retained Earnings Statements

	MAX Inc.	MIN Inc.
Balance, January 1, 2020	$200,000	$350,000
Net Income	$250,000	$115,000
Less: Dividends	($50,000)	($65,000)
Retained Earnings, Dec 31, 2020	$400,000	$400,000
Balance Sheets
	MAX Inc.	MIN Inc.
Cash	$100,000	$150,000
Accounts Receivable	$150,000	$150,000
Inventory	$200,000	$150,000
Investment in MIN Inc.	$750,000
Equipment (net)	$300,000	$150,000
Land		$100,000
Trademark		$300,000
Total Assets	$1,500,000	$1,000,000
Current Liabilities	$300,000	$150,000
Bonds Payable	$300,000	$150,000
Common Shares	$500,000	$300,000
Retained Earnings	$400,000	$400,000
Total Liabilities and Equity	$1,500,000	$1,000,000

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.

Purchase Price for 80% ownership interest		$750,000
Implied value of 100% of MIN	($750,000/0.80)	$937,500
Less: carrying value of MIN:	$300,000 + $150,000	$450,000
Acquisition Differential		$487,500
Allocated
Trademark	$80,000
Bonds Payable	($30,000)	$50,000
Goodwill		$437,500

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Medium
Learning Objective: 06-02 Prepare consolidated financial statements that reflect the elimination and subsequent realization of upstream and downstream intercompany profits in inventory.
Learning Objective: 06-05 Prepare the journal entries under the equity method to reflect the elimination and subsequent realization of intercompany profits in inventory and land.
Topic: 06-07 Upstam Versus Downstream Transactions
Topic: 06-08 Intercompany Inventory Profits: Subsidiary Selling (Upstream Transactions)
Topic: 06-09 Holdback of Inventory Profits-Year 4
Topic: 06-11 Realization of Inventory Profits-Year 5
Topic: 06-13 Intercompany Inventory Profits: Parent Selling (Downstream Transactions)
Topic: 06-18 Intercompany Land Profit Holdback
Topic: 06-23 Analysis and Interpretation of Financial Statements

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

	MAX Inc.	MIN Inc.
Sales	$640,000	$520,000
Other Revenues	$360,000	$160,000
Less: Expenses
Cost of Goods Sold	$480,000	$390,000
Depreciation Expense	$40,000	$20,000
Other Expenses	$80,000	$40,000
Income Tax Expense	$250,000	$115,000
Net Income	$250,000	$115,000

Retained Earnings Statements

	MAX Inc.	MIN Inc.
Balance, January 1, 2020	$200,000	$350,000
Net Income	$250,000	$115,000
Less: Dividends	($50,000)	($65,000)
Retained Earnings, Dec 31, 2020	$400,000	$400,000
Balance Sheets
	MAX Inc.	MIN Inc.
Cash	$100,000	$150,000
Accounts Receivable	$150,000	$150,000
Inventory	$200,000	$150,000
Investment in MIN Inc.	$750,000
Equipment (net)	$300,000	$150,000
Land		$100,000
Trademark		$300,000
Total Assets	$1,500,000	$1,000,000
Current Liabilities	$300,000	$150,000
Bonds Payable	$300,000	$150,000
Common Shares	$500,000	$300,000
Retained Earnings	$400,000	$400,000
Total Liabilities and Equity	$1,500,000	$1,000,000

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.

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.

Schedule of Realized and Unrealized Profits, 2020

Unrealized Profits Realized During 2020:
MAX Inc:	Before Tax	After Tax
Profits in Beginning Inventory	$2,400	$1,200
$60,000 × 20% = $12,000; $12,000 – ($12,000/1.25) = $2,400
MIN Inc:
Profits in Beginning Inventory	$1,600	$800
$40,000 × 20% = $8,000; $8,000 – ($8,000/1.25) = $1,600
Unrealized Profits at December 31, 2020:
MAX Inc:	Before Tax	After Tax
Inventory Sales	$4,000	$2,000
$80,000 × 25% = $20,000; $20,000 – ($20,000/1.25) = $4,000
MIN Inc:
Inventory Sales	$2,000	$1,000
$50,000 × 20% = $10,000; $10,000 – ($10,000/1.25)
Land sale – MAX to MIN Unrealized gain $100,000 – $40,000	$60,000	$30,000

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

	MAX Inc.	MIN Inc.
Sales	$640,000	$520,000
Other Revenues	$360,000	$160,000
Less: Expenses
Cost of Goods Sold	$480,000	$390,000
Depreciation Expense	$40,000	$20,000
Other Expenses	$80,000	$40,000
Income Tax Expense	$250,000	$115,000
Net Income	$250,000	$115,000

Retained Earnings Statements

	MAX Inc.	MIN Inc.
Balance, January 1, 2020	$200,000	$350,000
Net Income	$250,000	$115,000
Less: Dividends	($50,000)	($65,000)
Retained Earnings, Dec 31, 2020	$400,000	$400,000
Balance Sheets
	MAX Inc.	MIN Inc.
Cash	$100,000	$150,000
Accounts Receivable	$150,000	$150,000
Inventory	$200,000	$150,000
Investment in MIN Inc.	$750,000
Equipment (net)	$300,000	$150,000
Land		$100,000
Trademark		$300,000
Total Assets	$1,500,000	$1,000,000
Current Liabilities	$300,000	$150,000
Bonds Payable	$300,000	$150,000
Common Shares	$500,000	$300,000
Retained Earnings	$400,000	$400,000
Total Liabilities and Equity	$1,500,000	$1,000,000

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.

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.

MAX’s Income	$250,000
Less: Dividends from MIN	($52,000)
Less:
Unrealized land gain	$(30,000)
Ending Inventory Profit	$(2,000)
Add: Opening Inventory Profit:	$1,200
MAX’s Net Income–Adjusted		$167,200
MIN’s Net Income	$115,000
Less: Ending Inventory Profit	($1,000)
Add: Opening Inventory Profit	$800
Change to acquisition differential	($7,500)
MIN’s Adjusted Net Income		$107,300
Consolidated Net Income		$274,500

Changes to Acquisition Differential Schedule

	Balance Jan. 1, 2018	Changes to Dec. 31/19	Changes in 2020	Balance Dec. 31, 2020
Trademark	$80,000	$(8,000)	$(4,000)	$68,000
Bonds Payable	$(30,000)	$3,000	$1,500	$(25,500)
Goodwill	$437,500		(5,000)	$432,500
	$487,500	$(5,000)	$(7,500)	$475,000

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

	MAX Inc.	MIN Inc.
Sales	$640,000	$520,000
Other Revenues	$360,000	$160,000
Less: Expenses
Cost of Goods Sold	$480,000	$390,000
Depreciation Expense	$40,000	$20,000
Other Expenses	$80,000	$40,000
Income Tax Expense	$250,000	$115,000
Net Income	$250,000	$115,000

Retained Earnings Statements

	MAX Inc.	MIN Inc.
Balance, January 1, 2020	$200,000	$350,000
Net Income	$250,000	$115,000
Less: Dividends	($50,000)	($65,000)
Retained Earnings, Dec 31, 2020	$400,000	$400,000
Balance Sheets
	MAX Inc.	MIN Inc.
Cash	$100,000	$150,000
Accounts Receivable	$150,000	$150,000
Inventory	$200,000	$150,000
Investment in MIN Inc.	$750,000
Equipment (net)	$300,000	$150,000
Land		$100,000
Trademark		$300,000
Total Assets	$1,500,000	$1,000,000
Current Liabilities	$300,000	$150,000
Bonds Payable	$300,000	$150,000
Common Shares	$500,000	$300,000
Retained Earnings	$400,000	$400,000
Total Liabilities and Equity	$1,500,000	$1,000,000

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.

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.

Non-Controlling Interest at Acquisition: ($937,500 × 20%)		$187,500
Add (Deduct):
Increase in MIN’s Retained Earnings $400,000 – $150,000	$250,000
Add/Deduct: Changes to Acquisition differential:
Trademark	($12,000)
Bonds Payable	$4,500
Goodwill Impairment	($5,000)
Less: Unrealized Inventory Profit at year end:	($1,000)
Subtotal	$236,500
	× 20%	$47,300
Non-Controlling Interest		$234,800

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

	MAX Inc.	MIN Inc.
Sales	$640,000	$520,000
Other Revenues	$360,000	$160,000
Less: Expenses
Cost of Goods Sold	$480,000	$390,000
Depreciation Expense	$40,000	$20,000
Other Expenses	$80,000	$40,000
Income Tax Expense	$250,000	$115,000
Net Income	$250,000	$115,000

Retained Earnings Statements

	MAX Inc.	MIN Inc.
Balance, January 1, 2020	$200,000	$350,000
Net Income	$250,000	$115,000
Less: Dividends	($50,000)	($65,000)
Retained Earnings, Dec 31, 2020	$400,000	$400,000
Balance Sheets
	MAX Inc.	MIN Inc.
Cash	$100,000	$150,000
Accounts Receivable	$150,000	$150,000
Inventory	$200,000	$150,000
Investment in MIN Inc.	$750,000
Equipment (net)	$300,000	$150,000
Land		$100,000
Trademark		$300,000
Total Assets	$1,500,000	$1,000,000
Current Liabilities	$300,000	$150,000
Bonds Payable	$300,000	$150,000
Common Shares	$500,000	$300,000
Retained Earnings	$400,000	$400,000
Total Liabilities and Equity	$1,500,000	$1,000,000

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.

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.

MAX’s Retained Earnings	$400,000
Less:
Ending Inventory Profit	(2,000)
Unrealized gain–land	(30,000)
MAX’s Adjusted Retained Earnings		$368,000
Increase in MIN’s Retained Earnings since acquisition: $400,000 – $150,000	$250,000
Changes in acquisition differential (2018–2020)	(12,500)
Less: Unrealized Profit in Ending Inventory	(1,000)
MIN’s Adjusted Retained Earnings Increase	$236,500
	× 80%	$189,200
Consolidated Retained Earnings		$557,200

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

	MAX Inc.	MIN Inc.
Sales	$640,000	$520,000
Other Revenues	$360,000	$160,000
Less: Expenses
Cost of Goods Sold	$480,000	$390,000
Depreciation Expense	$40,000	$20,000
Other Expenses	$80,000	$40,000
Income Tax Expense	$250,000	$115,000
Net Income	$250,000	$115,000

Retained Earnings Statements

	MAX Inc.	MIN Inc.
Balance, January 1, 2020	$200,000	$350,000
Net Income	$250,000	$115,000
Less: Dividends	($50,000)	($65,000)
Retained Earnings, Dec 31, 2020	$400,000	$400,000
Balance Sheets
	MAX Inc.	MIN Inc.
Cash	$100,000	$150,000
Accounts Receivable	$150,000	$150,000
Inventory	$200,000	$150,000
Investment in MIN Inc.	$750,000
Equipment (net)	$300,000	$150,000
Land		$100,000
Trademark		$300,000
Total Assets	$1,500,000	$1,000,000
Current Liabilities	$300,000	$150,000
Bonds Payable	$300,000	$150,000
Common Shares	$500,000	$300,000
Retained Earnings	$400,000	$400,000
Total Liabilities and Equity	$1,500,000	$1,000,000

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.

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.

MAX Inc
Consolidated Statement of Financial Position
as at December 31, 2017

Cash ($100,000 + $150,000)	$250,000
Accounts Receivable ($150,000 + $150,000)	$300,000
Inventory ($200,000 + $150,000 – $4,000 – $2,000)	$344,000
Goodwill	$432,500
Equipment (net) ($300,000 + $150,000)	$450,000
Land ($100,000 – $60,000)	$40,000
Trademark ($300,000 + $68,000)	$368,000
Deferred Income Taxes ($1,000 + $2,000 +$30,000)	$33,000
Total Assets	$2,217,500
Current Liabilities ($300,000 + $150,000)	$450,000
Bonds Payable ($300,000 + $150,000 + $25,500)	$475,500
Non-Controlling Interest	$234,800
Common Shares	$500,000
Retained Earnings	$557,200
Total Liabilities and Equity	$2,217,500

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

	YIN Inc.	YANG Inc.
Sales	$500,000	$400,000
Other Revenues	$100,000	$60,000
Less: Expenses
Cost of Goods Sold	$400,000	$320,000
Depreciation Expense	$20,000	$10,000
Other Expenses	$60,000	$30,000
Income Tax Expense	$48,000	$40,000
Net Income	$72,000	$60,000

Retained Earnings Statements

	YIN Inc.	YANG Inc.
Balance, July 1, 2019	$200,000	$240,000
Net Income	$72,000	$60,000
Less: Dividends	($22,000)	($30,000)
Retained Earnings, June 30, 2020	$250,000	$270,000
Balance Sheets
	YIN Inc.	YANG Inc.
Cash	$150,000	$120,000
Accounts Receivable	$350,000	$160,000
Inventory	$200,000	$180,000
Investment in YANG Inc.	$500,000
Land	$40,000
Equipment (net)	$360,000	$240,000
Total Assets	$1,600,000	$700,000
Current Liabilities	$600,000	$130,000
Bonds Payable	$250,000	$100,000
Common Shares	$500,000	$200,000
Retained Earnings	$250,000	$270,000
Total Liabilities and Equity	$1,600,000	$700,000

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.

Purchase Price	$500,000
Imputed Purchase Price for 100% ($500,000/.75)	$666,667
NBV of Net Assets of YANG	$300,000
Acquisition differential	$366,667
Allocated:
Bonds Payable	$50,000
Goodwill	$416,667

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

	YIN Inc.	YANG Inc.
Sales	$500,000	$400,000
Other Revenues	$100,000	$60,000
Less: Expenses
Cost of Goods Sold	$400,000	$320,000
Depreciation Expense	$20,000	$10,000
Other Expenses	$60,000	$30,000
Income Tax Expense	$48,000	$40,000
Net Income	$72,000	$60,000

Retained Earnings Statements

	YIN Inc.	YANG Inc.
Balance, July 1, 2019	$200,000	$240,000
Net Income	$72,000	$60,000
Less: Dividends	($22,000)	($30,000)
Retained Earnings, June 30, 2020	$250,000	$270,000
Balance Sheets
	YIN Inc.	YANG Inc.
Cash	$150,000	$120,000
Accounts Receivable	$350,000	$160,000
Inventory	$200,000	$180,000
Investment in YANG Inc.	$500,000
Land	$40,000
Equipment (net)	$360,000	$240,000
Total Assets	$1,600,000	$700,000
Current Liabilities	$600,000	$130,000
Bonds Payable	$250,000	$100,000
Common Shares	$500,000	$200,000
Retained Earnings	$250,000	$270,000
Total Liabilities and Equity	$1,600,000	$700,000

Other Information:

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.

Schedule of Realized and Unrealized Profits

For the year ended June 30, 2020

YIN Inc:	Before Tax	After Tax
Profits in Beginning Inventory	$4,000	$2,400
$60,000 × 20% = $12,000; $12,000 – ($12,000/1.5)
YANG Inc:
Profits in Beginning Inventory	$15,000	$9,000
$90,000 × 50% = $45,000; $45,000 – ($45,000/1.5)
Unrealized Profits as at June 30, 2020:
YIN Inc:	Before Tax	After Tax
Inventory Sales	$10,000	$6,000
$90,000 x 1/3 = $30,000; $30,000 – ($30,000/1.5)
YANG Inc:
Inventory Sales	$8,000	$4,800
$120,000 × 20% = $24,000; $24,000 – ($24,000/1.5)
Unrealized Gain on Land Sale to YIN	$16,000	$9,600

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

	YIN Inc.	YANG Inc.
Sales	$500,000	$400,000
Other Revenues	$100,000	$60,000
Less: Expenses
Cost of Goods Sold	$400,000	$320,000
Depreciation Expense	$20,000	$10,000
Other Expenses	$60,000	$30,000
Income Tax Expense	$48,000	$40,000
Net Income	$72,000	$60,000

Retained Earnings Statements

	YIN Inc.	YANG Inc.
Balance, July 1, 2019	$200,000	$240,000
Net Income	$72,000	$60,000
Less: Dividends	($22,000)	($30,000)
Retained Earnings, June 30, 2020	$250,000	$270,000
Balance Sheets
	YIN Inc.	YANG Inc.
Cash	$150,000	$120,000
Accounts Receivable	$350,000	$160,000
Inventory	$200,000	$180,000
Investment in YANG Inc.	$500,000
Land	$40,000
Equipment (net)	$360,000	$240,000
Total Assets	$1,600,000	$700,000
Current Liabilities	$600,000	$130,000
Bonds Payable	$250,000	$100,000
Common Shares	$500,000	$200,000
Retained Earnings	$250,000	$270,000
Total Liabilities and Equity	$1,600,000	$700,000

Other Information:

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.

YIN Inc.
Consolidated Income Statement for the Year Ended
June 30, 2020.

Sales	($500,000 + $400,000 – $90,000 – $120,000)	$690,000
Other Revenues	($100,000 + $60,000 – $16,000 – $22,500)	$121,500
Total revenue		$811,500
Less: Expenses:
Cost of Goods Sold	($400,000 + $320,000 – $90,000 – $120,000 – $15,000 – $4,000 + $10,000 + $8,000)	$509,000
Depreciation Expense	($20,000 + $10,000)	$30,000
Other Expenses	($60,000 + $30,000) – $5,000	$85,000
Income Tax Expense	($48,000 + $40,000 – $6,400 + $6,000 + $1,600 – $4,000 – $3,200)	$82,000
Net Income		$105,500
Attributable to:
Shareholders of Parent		$90,600
Non-Controlling Interest	[($60,000 + $9,000 – $4,800 – $9,600 + $5,000) × 25%]	$14,900

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

	YIN Inc.	YANG Inc.
Sales	$500,000	$400,000
Other Revenues	$100,000	$60,000
Less: Expenses
Cost of Goods Sold	$400,000	$320,000
Depreciation Expense	$20,000	$10,000
Other Expenses	$60,000	$30,000
Income Tax Expense	$48,000	$40,000
Net Income	$72,000	$60,000

Retained Earnings Statements

	YIN Inc.	YANG Inc.
Balance, July 1, 2019	$200,000	$240,000
Net Income	$72,000	$60,000
Less: Dividends	($22,000)	($30,000)
Retained Earnings, June 30, 2020	$250,000	$270,000
Balance Sheets
	YIN Inc.	YANG Inc.
Cash	$150,000	$120,000
Accounts Receivable	$350,000	$160,000
Inventory	$200,000	$180,000
Investment in YANG Inc.	$500,000
Land	$40,000
Equipment (net)	$360,000	$240,000
Total Assets	$1,600,000	$700,000
Current Liabilities	$600,000	$130,000
Bonds Payable	$250,000	$100,000
Common Shares	$500,000	$200,000
Retained Earnings	$250,000	$270,000
Total Liabilities and Equity	$1,600,000	$700,000

Other Information:

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.

Non-Controlling Interest at Acquisition: ($666,667 × 25%)		$166,667
Add (Deduct):
Increase in YANG’s Retained Earnings $270,000 – $100,000	$170,000
Add/Deduct: Changes in acquisition differential:
Bonds Payable $5,000 × 3	$15,000
Less: Unrealized Inventory Profit at year end:	($4,800)
Less: Unrealized Land Gain:	($9,600)
Subtotal	($170,600)
	× 25%	$42,650
Non-Controlling Interest		$209,317

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

	YIN Inc.	YANG Inc.
Sales	$500,000	$400,000
Other Revenues	$100,000	$60,000
Less: Expenses
Cost of Goods Sold	$400,000	$320,000
Depreciation Expense	$20,000	$10,000
Other Expenses	$60,000	$30,000
Income Tax Expense	$48,000	$40,000
Net Income	$72,000	$60,000

Retained Earnings Statements

	YIN Inc.	YANG Inc.
Balance, July 1, 2019	$200,000	$240,000
Net Income	$72,000	$60,000
Less: Dividends	($22,000)	($30,000)
Retained Earnings, June 30, 2020	$250,000	$270,000
Balance Sheets
	YIN Inc.	YANG Inc.
Cash	$150,000	$120,000
Accounts Receivable	$350,000	$160,000
Inventory	$200,000	$180,000
Investment in YANG Inc.	$500,000
Land	$40,000
Equipment (net)	$360,000	$240,000
Total Assets	$1,600,000	$700,000
Current Liabilities	$600,000	$130,000
Bonds Payable	$250,000	$100,000
Common Shares	$500,000	$200,000
Retained Earnings	$250,000	$270,000
Total Liabilities and Equity	$1,600,000	$700,000

Other Information:

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.

YIN’s Retained Earnings	$250,000
Less: Ending Inventory Profit	($6,000)
YIN’s Adjusted Retained Earnings		$244,000
Increase in YANG’s Retained Earnings since acquisition:	$170,000
Changes to acquisition differential to date (Bonds)	$15,000
Less: Unrealized Inventory Profit at year end:	($4,800)
Less: Unrealized Land Gain:	($9,600)
YANG’s Adjusted Retained Earnings Increase	$170,600
	× 75%	$127,950
Consolidated Retained Earnings		$371,950

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

	YIN Inc.	YANG Inc.
Sales	$500,000	$400,000
Other Revenues	$100,000	$60,000
Less: Expenses
Cost of Goods Sold	$400,000	$320,000
Depreciation Expense	$20,000	$10,000
Other Expenses	$60,000	$30,000
Income Tax Expense	$48,000	$40,000
Net Income	$72,000	$60,000

Retained Earnings Statements

	YIN Inc.	YANG Inc.
Balance, July 1, 2019	$200,000	$240,000
Net Income	$72,000	$60,000
Less: Dividends	($22,000)	($30,000)
Retained Earnings, June 30, 2020	$250,000	$270,000
Balance Sheets
	YIN Inc.	YANG Inc.
Cash	$150,000	$120,000
Accounts Receivable	$350,000	$160,000
Inventory	$200,000	$180,000
Investment in YANG Inc.	$500,000
Land	$40,000
Equipment (net)	$360,000	$240,000
Total Assets	$1,600,000	$700,000
Current Liabilities	$600,000	$130,000
Bonds Payable	$250,000	$100,000
Common Shares	$500,000	$200,000
Retained Earnings	$250,000	$270,000
Total Liabilities and Equity	$1,600,000	$700,000

Other Information:

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.

YIN Inc
Investment in YANG Account
as at June 30, 2020

Investment at Cost		$500,000
Increase in Retained Earnings since acquisition:	$170,000
	× 75%	$127,500
Ending Inventory (downstream)		($6,000)
Changes in acquisition differential since acquisition:
Bonds: ($50,000 × 75%) / 10 × 3	$11,250	$11,250
Less: Unrealized Profits at year end (Upstream)
Land	$9,600
Inventory	$4,800
	$14,400
	× 75%	($10,800)
Investment in YANG as at June 30, 2020		$621,950

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