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LEO Inc Acquired a 60% Interest in MARS Inc

question 7

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%. What would be the balance in the investment in MARS account at December 31, 2013?

Definitions:

Operations Expenses

Operations expenses refer to the costs associated with the day-to-day activities of maintaining a business, including manufacturing, marketing, and administrative expenses.

Indirect Political Risk

The potential for losses or negative impacts on a business due to political decisions or events that indirectly affect the operating environment.

Collateral Damage

Unintended or incidental damage or casualties not directly intended by the action.

Economic Swings

Periods of economic fluctuation that a country experiences, encompassing both expansions (growth) and contractions (recessions) in its economy.