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

question 55

Multiple Choice

On January 1, 2019, Ting Corp. acquired 75% of Won Corp. for $1,500,000. Ting uses the cost method to account for its investment in Won. On January 1, 2019, Won's retained earnings and common shares were $600,000 and $220,000, respectively.
Won'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 $50,000 higher than its book value.
? A patent (which had not previously been accounted for) was identified on the acquisition date with an estimated fair value of $20,000. The patent had an estimated useful life of 5 years.
The Financial Statements of Ting Corp. and Won Corp. for the year ended December 31, 2020 are shown below:
Income Statements
$\begin{array}{|l|r|r|}\hline & \text { Ting Corp. } & \text { Won Corp. } \\\hline \text { Sales } & \$ 1,000,000 & \$ 600,000 \\\hline \text { Other Revenues } & \$ 600,000 & \$ 240,000 \\\hline \text { Less: Expenses } & & \\\hline \text { Cost of Goods Sold } & \$ 800,000 & \$ 480,000 \\\hline \text { Depreciation Expense } & \$ 40,000 & \$ 20,000 \\\hline \text { Other Expenses } & \$ 160,000 & \$ 80,000 \\\hline \text { Income Tax Expense } & \$ 240,000 & \$ 104,000 \\\hline \text { Net Income } & \$ 360,000 & \$ 156,000 \\\hline\end{array}$ Retained Earnings Statements
$\begin{array}{|l|r|r|}\hline & \text { Ting Corp } & \text { Won Corp } \\\hline \text { Balance, January 1, 2020 } & \$ 400,000 & \$ 700,000 \\\hline \text { Net Income } & \$ 360,000 & \$ 156,000 \\\hline \text { Less: Dividends } & (\$ 60,000) & \$ 76,000) \\\hline \text { Retained Earnings } & \$ 700,000 & \$ 780,000 \\\hline\end{array}$ Balance Sheets:
$\begin{array}{|l|r|r|}\hline & \text { Ting Corp } & \text { Won Corp. } \\\hline \text { Cash } & \$ 339,250 & \$ 50,000 \\\hline \text { Accounts Receivable } & \$ 500,000 & \$ 500,000 \\\hline \text { Inventory } & \$ 100,000 & \$ 500,000 \\\hline \text { Investment in Won Corp. } & \$ 1,500,000 & \\\hline \begin{array}{l}\text { Investment in Won Corp. } \\\text { bonds }\end{array} & \$ 60,750 & \\\hline \text { Land } & & \$ 50,000 \\\hline \text { Equipment } & \$ 1,000,000 & \$ 450,000 \\\hline \text { Accumulated Depreciation } & (\$ 500,000) & (\$ 300,000) \\\hline \text { Total Assets } & \$ 3,000,000 & \$ 1,250,000 \\\hline\\\hline \text { Current Liabilities } & \$ 1,300,000 & \$ 119,000 \\\hline \text { Bonds Payable } & & \$ 150,000 \\\hline \text { Less: Bond Discount } & & (\$ 19,000) \\\hline \text { Common Shares } & \$ 1,000,000 & \$ 220,000 \\\hline \text { Retained Earnings } & \$ 700,000 & \$ 780,000 \\\hline \text { Total Liabilities and Equity } & \$ 3,000,000 & \$ 1,250,000 \\\hline\end{array}$ Other Information:
? Won sold a tract of land to Ting at a profit of $20,000 during 2019. This land is still the property of Ting Corp.
? On January 1, 2020, Won sold equipment to Ting at a price that was $20,000 lower than its book value. The equipment had a remaining useful life of 5 years from that date.
? On January 1, 2020, Won's inventories contained items purchased from Ting for $120,000. This entire inventory was sold to outsiders during the year. Also during 2020, Won sold inventory to Ting for $30,000. Half this inventory is still in Ting's warehouse at year end. All sales are priced at a 20% mark-up above cost, regardless of whether the sales are internal or external.
? There was a goodwill impairment loss of $10,000 during 2019.
? Both companies are subject to an effective tax rate of 40%.
? Both companies use straight line amortization exclusively.
? On January 1, 2020, Ting acquired half of Won's bonds for $60,000.
? The bonds carry a coupon rate of 10% and mature on January 1, 2040. The initial bond issue took place on January 1, 2020. The total discount on the issue date of the bonds was $20,000.
? Gains and losses from intercompany bond holdings are to be allocated to the two companies when consolidated statements are prepared.
What effect would the intercompany bond sale have on Won?

• A) Won would record a loss $14,000.
• B) Won would record a loss of $10,000.
• C) Won would record a gain of $4,000.
• D) Won would record a gain of $10,000.

Understand the impact of different risk types on the opportunity cost of capital.

Calculate the Net Present Value (NPV) of investment opportunities accounting for inflation and risk.

Assess the cost of capital for firms, including the influence of debt and equity.

Identify financial decision-making criteria for consumers and businesses.

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Definitions:

Stare Decisis

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