LEO Inc Acquired a 60% Interest in MARS Inc

question 56

Multiple Choice

LEO Inc. acquired a 60% interest in MARS Inc. on January 1, 2019 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 2019:
▪ MARS reported a net income and declared dividends of $25,000 and $5,000 respectively.
▪ LEO's December 31, 2019 inventory contained an intercompany profit of $10,000.
▪ LEO's net income was $75,000.
The following took place during 2020:
▪ MARS reported a net income and declared dividends of $36,000 and $6,000 respectively.
▪ MARS' December 31, 2020 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%.
What would be the change in the non-controlling interest account for 2019?

• A) Non-controlling interest would decrease by $27,800.
• B) Non-controlling interest would decrease by $18,000.
• C) Non-controlling interest would increase by $18,000.
• D) Non-controlling interest would increase by $27,800.

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Definitions:

Marginal Cost

The cost incurred by producing an additional unit of a product or service.

Elasticity

A measure of how much the quantity demanded or supplied of a good responds to a change in one of its determinants, such as its price.

Marginal Cost

Marginal cost is the increase in total production cost that arises from producing one additional unit of a product or service.

Subsidy

A financial contribution granted by the government or a public body to help an industry or business keep the price of a commodity or service low.