King Corp Owns 80% of Kong Corp

question 8

Multiple Choice

King Corp. owns 80% of Kong Corp. and uses the cost method to account for its investment, chapters) Corp. for the Year ended December 31, 2012 are shown below: Other Information: ▪King sold a tract of Land to Kong at a profit of $10,000 during 2012. This land is still the property of Kong Corp.
▪On January 1, 2012, 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, 2012, King's inventories contained items purchased from Kong for $10,000. This entire inventory was sold to outsiders during the year. Also during 2012, 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 above cost, regardless of whether the sales are internal or external.
▪Kong's Retained Earnings on the date of acquisition amounted to $350,000. There have been no changes to the company's common shares account.
▪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 2012.
▪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 3 years.
▪There was a goodwill impairment loss of $4,000 during 2012.
▪Both companies are subject to an effective tax rate of 40%.
▪Both companies use straight line amortization. The amount of goodwill arising from this business combination is:

• A) Nil.
• B) $72,000.
• C) $130,000.
• D) $220,000.

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