On January 1, 2015, King Corp. acquired 80% off Kong Corp. for $500,000. King uses the cost
Question:
On January 1, 2015, King Corp. acquired 80% off Kong Corp. for $500,000. King uses the cost method to account for its investment.
On January 1, 2015, Kong's retained earnings and common shares were $350,000 and $110,000, respectively.
Kong's book values did not differ materially from its fair values on the date of acquisition with the following exceptions:
- Inventory had a fair value that was $20,000 higher than its book value. This inventory was sold to outsiders during 2015.
- A patent (which had not previously been accounted for) was identified on the acquisition date with an estimated fair value of $15,000. The patent had an estimated useful life of 6 years.
The Financial Statements of King Corp. and Kong Corp. for the year ended December 31, 2020
are shown below:
Income Statements | King Corp. | Kong Corp. |
Sales | $500,000 | $300,000 |
Other Revenues | $300,000 | $120,000 |
Less: Expenses | ||
Cost of Goods Sold | $400,000 | $240,000 |
Depreciation Expense | $ 20,000 | $10,000 |
Other Expenses | $80,000 | $40,000 |
Income Tax Expense | $120,000 | $52,000 |
Net Income | $180,000 | $78,000 |
Balance Sheets | King Corp. | Kong Corp. |
Cash | $50,000 | $25,000 |
Accounts Receivable | $100,000 | $250,000 |
Inventory | $50,000 | $250,000 |
Investment in Kong Corp. | $500,000 | |
Land | $25,000 | |
Equipment | $400,000 | $200,000 |
Accumulated Depreciation | ($250,000) | ($150,000) |
Total Assets | $850,000 | $600,000 |
Current Liabilities | $320,000 | $62,000 |
Dividends Payable | $30,000 | $38,000 |
Common Shares | $100,000 | $110,000 |
Retained Earnings | $400,000 | $390,000 |
Total Liabilities and Equity | $850,000 | $600,000 |
Other Information:
- King sold a tract of Land to Kong at a profit of $10,000 during 2016. This land is still the property of Kong Corp.
- On January 1, 2018, Kong sold equipment to King at a price that was $20,000 higher than its book value. The equipment had a remaining useful life of 4 years from that date.
- On January 1, 2020, King's inventories contained items purchased during 2019 from Kong for $10,000. This entire inventory was sold to outsiders during 2020. Also during 2020, King sold inventory to Kong for $50,000. Half this inventory is still in Kong's warehouse at year-end. All sales are priced at a 25% mark-up on selling price, regardless of whether the sales are internal or external.
- There was a goodwill impairment loss of $4,000 during 2020.
- Both companies are subject to an effective tax rate of 40%
- Both companies use straight-line amortization.
- Dividends paid in 2020: King $30,000 Kong $38,000
Required:
- Prepare a statement of computation and allocation of Acquisition Differential as of January 1, 2015, showing the amount of NCI on the date of acquisition of Kong.
- Prepare the Acquisition Differential Amortization / Impairment Statement as of December 31, 2020
- Prepare a Statement of Realized / Unrealized After-Tax Profit on Inter-Company Sale of Inventory for the year ended December 31, 2020
- Prepare a Statement of Realized / Unrealized After-Tax Gain on Sale of Land
- Prepare a Statement of Realized / Unrealized After-Tax Gain on Sale of Equipment
- Compute the Consolidated Net Income for the Year Ended December 31, 2020, showing the profit allocated to Non-Controlling Interests (NCI)
- Prepare a Statement of Consolidated Retained Earnings for the year ended December 31, 2020
- Prepare a Statement of Non-Controlling Interests (NCI) Balance Sheet as of December 31, 2020
- Use your calculations in a through h above to prepare the Consolidated Income Statement and Balance Sheet of Kong as at December 31, 2020
Expert Answer:
