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LEO Inc Acquired a 60% Interest in MARS Inc

question 12

Multiple Choice

LEO Inc. acquired a 60% interest in MARS Inc. on January 1, 2012 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 2012: ▪MARS reported a net income and declared dividends of $25,000 and $5,000 respectively.
▪LEO's December 31, 2012 inventory contained an intercompany profit of $10,000.
▪LEO's net income was $75,000. The following took place during 2013:
▪MARS reported a net income and declared dividends of $36,000 and $6,000 respectively.
▪MARS' December 31, 2013 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 once again 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 2013?

Understand the process and challenges involved in designing an activity-based costing system.

Recognize the significance of separating activities into different levels for accurate costing.

Analyze the correlation between overhead costs and different allocation bases.

Grasp the complexity and structure of an activity-based costing system compared to traditional costing systems.

Definitions:

Restrictive

A term describing measures or policies that limit or constrain actions, activities, or expansions.

Variable Cost

Costs that change in proportion to the level of output or activity, such as materials and labor directly involved in production.

Firm

A firm is a business organization that produces and sells goods or services in an effort to generate profit.

Shut Down

The temporary or permanent closure of a business operation due to various reasons such as financial losses, market conditions, or legal mandates.