The Following Information Pertains to Questions

question 37

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%.
-Consolidated Net Income for 2009 would be:

• A)$69,150
• B)$57,850
• C)$58,000
• D)$56,000

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Definitions:

Equivalent Units

A concept used in cost accounting to express the amount of work done by various units of production collectively, taking into account both complete and partially complete units.

Direct Labor

The wages and other costs for labor directly involved in the production of goods or provision of services.

Weighted Average Method

An inventory valuation method where costs of goods sold and ending inventory are determined by taking the weighted average of all units available for sale during the period.

Work in Process Inventory

Inventory that includes goods that are in the production process but are not yet complete.