LEO Inc Acquired a 60% Interest in MARS Inc

question 32

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%. The amount of goodwill arising from this combination would be:

• A) $120,000.
• B) $130,000.
• C) $200,000.
• D) $296,667.

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