On January 1, 2019, King Corp Retained Earnings Statements Balance Sheets

question 15

Multiple Choice

On January 1, 2019, King Corp. acquired 80% of Kong Corp. for $500,000. King uses the cost method to account for its investment. On January 1, 2019, Kong's retained earnings and common shares were $350,000 and $110,000, respectively.
Kong's book values did not differ materially from its fair values on the date of acquisition with the following exceptions:
? Inventory had a fair value that was $20,000 higher than its book value. This inventory was sold to outsiders during 2019.
? A patent (which had not previously been accounted for) was identified on the acquisition date with an estimated fair value of $15,000. The patent had an estimated useful life of 3 years.
The Financial Statements of King Corp. and Kong Corp. for the year ended December 31, 2020 are shown below:
Income Statements
$\begin{array}{|l|r|r|}\hline & \text { King Corp. } & \text { Kong Corp. } \\\hline \text { Sales } & \$ 500,000 & \$ 300,000 \\\hline \text { Other Revenues } & \$ 300,000 & \$ 120,000 \\\hline \text { Less: Expenses } & & \\\hline \text { Cost of Goods Sold } & \$ 400,000 & \$ 240,000 \\\hline \text { Depreciation Expense } & \$ 20,000 & \$ 10,000 \\\hline \text { Other Expenses } & \$ 80,000 & \$ 40,000 \\\hline \text { Income Tax Expense } & \$ 120,000 & \$ 52,000 \\\hline \text { Net Income } & \$ 180,000 & \$ 78,000 \\\hline\end{array}$ Retained Earnings Statements
$\begin{array}{|l|r|r|}\hline & \text { King Corp } & \text { Kong Corp } \\\hline \text { Balance, January 1, 2020 } & \$ 250,000 & \$ 350,000 \\\hline \text { Net Income } & \$ 180,000 & \$ 78,000 \\\hline \text { Less: Dividends } & (\$ 30,000) &( \$ 38,000) \\\hline \text { Retained Earnings } & \$ 400,000 & \$ 390,000 \\\hline\end{array}$ Balance Sheets
$\begin{array}{|l|r|r|}\hline & \text { King Corp } & \text { Kong Corp } \\\hline \text { Cash } & \$ 50,000 & \$ 25,000 \\\hline \text { Accounts Receivable } & \$ 100,000 & \$ 250,000 \\\hline \text { Inventory } & \$ 50,000 & \$ 250,000 \\\hline \text { Investment in Kong Corp. } & \$ 500,000 & \\\hline \text { Land } & & \$ 25,000 \\\hline \text { Equipment } & \$ 400,000 & \$ 200,000 \\\hline \text { Accumulated Depreciation } & (\$ 250,000) & (\$ 150,000) \\\hline \text { Total Assets } & \$ 850,000 & \$ 600,000 \\\hline \text { Current Liabilities } & \$ 320,000 & \$ 62,000 \\\hline \text { Dividends Payable } & \$ 30,000 & \$ 38,000 \\\hline \text { Common Shares } & \$ 100,000 & \$ 110,000 \\\hline \text { Retained Earnings } & \$ 400,000 & \$ 390,000 \\\hline \text { Total Liabilities and Equity } & \$ 850,000 & \$ 600,000 \\\hline\end{array}$ Other Information:
? King sold a tract of Land to Kong at a profit of $10,000 during 2020. This land is still the property of Kong Corp.
? On January 1, 2020, Kong sold equipment to King at a price that was $20,000 higher than its book value. The equipment had a remaining useful life of 4 years from that date.
? On January 1, 2020, King's inventories contained items purchased during 2019 from Kong for $10,000. This entire inventory was sold to outsiders during 2020. Also during 2020, King sold inventory to Kong for $50,000. Half this inventory is still in Kong's warehouse at year end. All sales are priced at a 25% mark-up above cost, regardless of whether the sales are internal or external.
? There was a goodwill impairment loss of $4,000 during 2020.
? Both companies are subject to an effective tax rate of 40%
? Both companies use straight line amortization.
Ignoring income taxes and any non-controlling interest effects, what is the amount of profit realized during 2020 from the intercompany sale of equipment?

• A) Nil
• B) $4,000
• C) $5,000
• D) $8,000

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