Asked by Caitlyn Pierson on Jun 10, 2024
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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
Ting Corp. Won Corp. Sales $1,000,000$600,000 Other Revenues $600,000$240,000 Less: Expenses Cost of Goods Sold $800,000$480,000 Depreciation Expense $40,000$20,000 Other Expenses $160,000$80,000 Income Tax Expense $240,000$104,000 Net Income $360,000$156,000\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} Sales Other Revenues Less: Expenses Cost of Goods Sold Depreciation Expense Other Expenses Income Tax Expense Net Income Ting Corp. $1,000,000$600,000$800,000$40,000$160,000$240,000$360,000 Won Corp. $600,000$240,000$480,000$20,000$80,000$104,000$156,000 Retained Earnings Statements
Ting Corp Won Corp Balance, January 1, 2020 $400,000$700,000 Net Income $360,000$156,000 Less: Dividends ($60,000) $76,000) Retained Earnings $700,000$780,000\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, January 1, 2020 Net Income Less: Dividends Retained Earnings Ting Corp $400,000$360,000($60,000) $700,000 Won Corp $700,000$156,000$76,000) $780,000 Balance Sheets:
Ting Corp Won Corp. Cash $339,250$50,000 Accounts Receivable $500,000$500,000 Inventory $100,000$500,000 Investment in Won Corp. $1,500,000 Investment in Won Corp. bonds $60,750 Land $50,000 Equipment $1,000,000$450,000 Accumulated Depreciation ($500,000) ($300,000) Total Assets $3,000,000$1,250,000 Current Liabilities $1,300,000$119,000 Bonds Payable $150,000 Less: Bond Discount ($19,000) Common Shares $1,000,000$220,000 Retained Earnings $700,000$780,000 Total Liabilities and Equity $3,000,000$1,250,000\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 \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} Cash Accounts Receivable Inventory Investment in Won Corp. Investment in Won Corp. bonds Land Equipment Accumulated Depreciation Total Assets Current Liabilities Bonds Payable Less: Bond Discount Common Shares Retained Earnings Total Liabilities and Equity Ting Corp $339,250$500,000$100,000$1,500,000$60,750$1,000,000($500,000) $3,000,000$1,300,000$1,000,000$700,000$3,000,000 Won Corp. $50,000$500,000$500,000$50,000$450,000($300,000) $1,250,000$119,000$150,000($19,000) $220,000$780,000$1,250,000 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 is the total amount of pre-tax profit from intercompany inventory sales that was realized during 2020?
A) $2,500
B) $6,200
C) $20,200
D) $22,500
Unrealized Profits
Profits that have been earned but not yet realized through a transaction, such as an increase in value of an asset that has not been sold.
Intercompany Sales
Transactions involving the exchange of goods or services between subsidiaries within the same parent company.
Mark-Up
The amount added to the cost price of goods to cover overhead and profit, resulting in the selling price.
- Analyze the consequence of inventory dealings on comprehensive financial statements.
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Learning Objectives
- Analyze the consequence of inventory dealings on comprehensive financial statements.
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