Income statements of M Co. and K Co. for the year ended December 31, Year 9, are presented below:

	M Co.			K Co.
Sales	$	600,000		$	350,000
Rent revenue		–			50,000
Interest revenue		6,700			–
Income from subsidiary		30,320			–
Gain on land sale		–			8,000
		637,020			408,000
Cost of goods sold		334,000			225,000
Distribution expense		80,000			70,000
Administrative expense		147,000			74,000
Interest expense		1,700			6,000
Income tax expense		20,700			7,500
		583,400			382,500
Profit	$	53,620		$	25,500

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 4. 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 9. 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 9, $50,000 rent was paid and was charged to administrative expense.
• In Year 7, 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 9, when it was sold to an unrelated company.
• During Year 9, K Co. made sales to M Co. totaling $90,000. The December 31, Year 9, inventories of M Co. contain an unrealized profit of $5,000. The January 1, Year 9, inventories of M Co. contained an unrealized profit of $12,000.
• On January 1, Year 7, 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 9.
• Tax allocation is to be used, assuming a 40% average corporate tax rate for this purpose.

Required:
(a) Prepare a consolidated income statement for Year 9.

(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 9 under the cost method.

Answer rating: 100% (QA)

a Acquisition differential buildings 1250 a Yearly amortization 25000 20 Intercompa... View the full answer