The Following Information Pertains to Questions

question 5

Multiple Choice

The following information pertains to questions
LEO Inc.acquired a 60% interest in MARS Inc.on January 1,2008 for $400,000.LEO uses the Cost method to account for its investment MARS Inc.On that 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 inventory.
$40,000 to equipment (To be amortized over 20 years)
The following took place during 2008:
MARS reported a net income and declared dividends of $25,000 and $5,000 respectively.
LEO's December 31,2008 inventory contained an intercompany profit of $10,000.
LEO's net income was $75,000.
The following took place during 2009:
MARS reported a net income and declared dividends of $36,000 and $6,000 respectively.
MARS' December 31,2009 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 2009?

• A)$20,000
• B)$17,550
• C)$16,000
• D)$16,800

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Definitions:

Return on Equity

A measure of financial performance calculated by dividing net income by shareholders' equity, indicating how well a company uses investments to generate earnings growth.

Retained Earnings

The portion of a company's profits that is kept or retained rather than paid out as dividends to shareholders.

Price-Earnings Ratio

A valuation metric that compares a company's share price to its earnings per share.

Common Stock

Equity ownership in a corporation, with voting rights and potential dividends, but after bankruptcy claim priority behind preferred stock.