Question: Income statements of M Cop and K Co for the

Income statements of M Cop. and K Co. for the year ended December 31, Year 6, are presented below:
Additional Information
• M Co. uses the equity method to account for its investment in K Co.
• M Co. acquired its 80% interest in K Co. on January 1, Year 1. On that date, the acquisition differential of $25,000 was allocated entirely to buildings; it is being amortized over a 20-year period.
• Amortization expense is grouped with distribution expenses, and impairment losses, if any, are grouped with other expenses.
• M Co. made an advance of $100,000 to K Co. on July 1, Year 6. This loan is due on demand and requires the payment of interest at 12% per year.
• M Co. rents marine equipment from K Co. During Year 6, $50,000 rent was paid and was charged to administrative expense.
• In Year 4, M Co. sold land to K Co. and recorded a profit of $10,000 on the sale. K Co. held the land until October, Year 6, when it was sold to an unrelated company.
• During Year 6, K Co. made sales to M Co. totalling $90,000. The December 31, Year 6, inventories of M Co. contain an unrealized profit of $5,000. The January 1,
Year 6, inventories of M Co. contained an unrealized profit of $12,000.
• On January 1, Year 4, M Co. sold machinery to K Co. and recorded a profit of $13,000. The remaining useful life on that date was five years. Assume straight-line depreciation.
• K Co. paid dividends of $20,000 during Year 6.
• Tax allocation is to be used, assuming a 40% average corporate tax rate for this purpose.
(a) Prepare a consolidated income statement for Year 6.
(b) Now assume that M Co. is a private company, uses ASPE, and chooses to use the cost method to report its investment in K Co. Prepare M Co.’s income statement for Year 6 under the cost method.

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