Jay Inc. owns 80% of Tesla Inc. and uses the cost method to account for its investment.

The 2020 income

statements of both companies are shown below.
 
  Jay Tesla
Gross Profit $100,000 $50,000
Miscellaneous Revenues/Losses $30,000 $20,000
Depreciation Expense $20,000 $15,000
Income Tax Expense $20,000 $ 6,000
Net Income $30,000 $ 9,000

On January 1, 2020, Tesla sold equipment to Jay at a profit of $3,000. The equipment had a remaining useful life of
twenty years on that date. Both companies are subject to an effective tax rate of 40%.

The amount of gross profit appearing on Jay's 2020 Consolidated Income Statement would be:

Explanation
Gross Profit on consolidated income statement = $150,000.
 

Jay (parent) gross profit $100,000

Tesla (sub) gross profit $50,000
Consolidated gross profit $150,000

The amount of Miscellaneous Revenues/Losses appearing on Jay's 2020 Consolidated Income Statement would
be:

Miscellaneous Revenues/Expenses on consolidated income statement = $53,000.

 
Jay (parent) miscellaneous (revenues) losses $30,000
Tesla (sub) miscellaneous (revenues) losses $20,000
Total Miscellaneous Losses $50,000
(Less from revenue) Add back unrealized revenue to $3,000
losses (increase amount of loss): deferral of pre-tax profit on
intercompany equipment sale from Tesla (sub) to Jay (parent)
Consolidated miscellaneous (revenues) losses $53,000

The amount of depreciation expense appearing on Jay's 2020 Consolidated Income Statement would be:

Depreciation Expense on consolidated income statement = $34,850.

 
Jay (parent) depreciation expense $20,000
Tesla (sub) depreciation expense $15,000
Less: realization of pre-tax profit on intercompany equipment sale ($150)
from Tesla (sub) to Jay (parent) [$3,000/20 years] [depreciation
expense overstated)
Consolidated depreciation expense $34,850
The amount of income tax expense appearing on Jay's 2020 Consolidated Income Statement would be:

Income Tax Expense on consolidated income statement = $24,860.

 
Jay (parent) income tax expense $20,000
Tesla (sub) income tax expense $6,000
Less: income tax on deferral of pre-tax profit on intercompany ($1,200)
equipment sale from Tesla (sub) to Jay (parent) [$3,000 × 40%]
Add: income tax on realization of pre-tax profit on intercompany $60
equipment sale from Tesla (sub) to Jay (parent) [$3,000/20 years ×
40%]
Consolidated income tax expense $24,860

The amount of non-controlling interest in Jay's 2020 Consolidated Net Income would be:

Non-controlling interest portion of consolidated net income = $1,458. Calculation of consolidated net income
2020:
 
    TOTAL Parent’s portion NCI portion
(CI) 20%
Parent’s net income   $30,000    
Less: dividend revenue ($0 × 80%) ($0)    
from sub (cost method)
Parent’s adjusted net   $30,000 $30,000 $0
income
Sub’s net income $9,000      
Less: deferral of after-tax ($1,800)      
gain on sale of
equipment (sub selling)
[$3,000 × (1 – 0.40) =
$1,800]
Add: after-tax gain $90      
realized by depreciation
(sub selling) [($3,000/20
years) × (1 – 0.40) = $90]
Less: amortization of ($0)      
acquisition differential
Sub’s adjusted net   $7,290 $5,832 $1,458
income
Consolidated net income   $37,290 $35,832 $1,458

The controlling interest (attributable to the shareholders of Jay) in Jay's 2020 Consolidated Net Income would
be:

$35,832 (from above)

The amount of deferred taxes appearing on Jay's 2020 Consolidated Statement of Financial Position would be:

The amount of deferred taxes appearing on Jay's 2020 Consolidated Statement of Financial Position = $1,140 =
($3,000 - $150 realized) × 40% tax rate.

SCHEDULE OF UNREALIZED INTERCOMPANY PROFITS

 
  Before tax 40% tax After tax
Equipment Gain–Tesla (sub) selling to      
Jay (parent)
Intercompany gain, Jan.1,2020 $3,000 $1,200 $1,800
less: realized by depreciation in 2020 $150 $60 $90
(20 years straight-line)
Balance, unrealized at Dec.31,2020 $2,850 $1,140 $1,710
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
 
  King Corp. Kong Corp.
Sales $500,000 $300,000
Other Revenues $300,000 $120,000
Less: Expenses    
Cost of Goods Sold $400,000 $240,000
Depreciation Expense $ 20,000 $10,000
Other Expenses $80,000 $40,000
Income Tax Expense $120,000 $52,000
Net Income $180,000 $78,000

Retained Earnings Statements
 
  King Corp. Kong Corp.
Balance, January 1, 2020 $250,000 $350,000
Net Income $180,000 $78,000
Less: Dividends ($30,000) ($38,000)
Retained Earnings $400,000 $390,000

Balance Sheets
 
  King Corp. Kong Corp.
Cash $50,000 $25,000
Accounts Receivable $100,000 $250,000
Inventory $50,000 $250,000
Investment in Kong Corp. $500,000  
Land   $25,000
Equipment $400,000 $200,000
Accumulated Depreciation ($250,000) ($150,000)
Total Assets $850,000 $600,000
Current Liabilities $320,000 $62,000
Dividends Payable $30,000 $38,000
Common Shares $100,000 $110,000
Retained Earnings $400,000 $390,000
Total Liabilities and Equity $850,000 $600,000

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.

What is the amount of goodwill arising from this business combination on the acquisition date?

Calculation of goodwill:
 
Acquisition cost for 80%   $500,000
Implied acquisition cost for 100% ($500,000/0.80) $625,000
Less: Carrying value of net ($110,000 common shares + $460,000
identifiable assets of subsidiary $350,000 retained earnings)
Acquisition differential   $165,000
Allocation: (FV–CV)  
Inventory 20,000  
Patent 15,000 35,000
Goodwill   $130,000

What would be the journal entry to record the dividends declared by King Corp during the year?

Retained earnings $30,000

Dividends payable $30,000
The amount of goodwill appearing on King's December 31, 2020 Consolidated Balance Sheet would be:

Changes to Acquisition Differential Schedule 

  Balance Changes in 2019 Changes in 2020 Balance Dec.31,2020
Jan.1,2019
Inventory $20,000 ($20,000) $0 $0
Patent $15,000 ($5,000) ($5,000) $5,000
Goodwill $130,000 $0 ($4,000) $126,000
  $165,000 ($25,000) ($9,000) $131,000
What amount of sales revenue would appear on King's Consolidated Income Statement for the year ended
December 31, 2020?

Sales Revenue on consolidated income statement = $750,000.

 
King (parent) sales revenue $500,000
Kong (sub) sales revenue $300,000
Less: intercompany sales revenue ($50,000)
Consolidated sales revenue $750,000

What would be the amount of other revenue appearing on King's Consolidated Income Statement for the year
ended December 31, 2020?

Other Revenue on consolidated income statement = $359,600.

 
King (parent) other revenue   $300,000
Kong (sub) other revenue   $120,000
Less: unrealized land gain   ($10,000)
Less: unrealized equipment gain   ($20,000)
Less: intercompany dividend revenue $38,000 × 80% ($30,400)
Consolidated other revenue   $359,600

What is the total amount of pre-tax profit from intercompany inventory sales that was realized during 2020?

Intercompany Realized/Unrealized Profits    

During 2020:
King Inc: Before Tax After Tax
Land–unrealized in 2020 $10,000 $6,000
Inventory Sales:    
Unrealized Profits at December 31, 2020:    
$50,000 × 50% = $25,000; $25,000 – $5,000 $3,000
($25,000/1.25) = $5,000 Note: 1/2; was
realized ($5,000) during the year; profit in
unsold inventory is unrealized until sold to
outsiders in 2021 ($5,000)
Kong Inc. Before Tax After Tax
Inventory Sales:    
Realized profits 2020–Beginning Inventory    
$10,000 – [$10,000/1.25] $2,000 $1,200
Equipment sale–Kong to King Unrealized $20,000 $12,000
gain
Realized equipment gain–2020 [$20,000/4 $5,000 $3,000
years)
Unrealized equipment gain–December 31, $15,000 $9,000
2020

Realized pre-tax profit from intercompany inventory sales during 2020 - $2,000 + $5,000 = $7,000.
What is the total amount of unrealized pre-tax profits in inventory at the start of 2021? $5,000

Intercompany Realized/Unrealized Profits    

During 2020:
King Inc: Before Tax After Tax
Land–unrealized in 2020 $10,000 $6,000
Inventory Sales:    
Unrealized Profits at December 31, 2020:    
$50,000 × 50% = $25,000; $25,000 – $5,000 $3,000
($25,000/1.25) = $5,000 Note: 1/2; was
realized ($5,000) during the year; profit in
unsold inventory is unrealized until sold to
outsiders in 2021 ($5,000)
Kong Inc. Before Tax After Tax
Inventory Sales:    
Realized profits 2020–Beginning Inventory    
$10,000 – [$10,000/1.25] $2,000 $1,200
Equipment sale–Kong to King Unrealized $20,000 $12,000
gain
Realized equipment gain–2020 [$20,000/4 $5,000 $3,000
years)
Unrealized equipment gain–December 31, $15,000 $9,000
2020

What would be the amount of consolidated patents appearing on King's Consolidated Balance Sheet as at
December 31, 2020?

Changes to Acquisition Differential Schedule, $5,000

 
  Balance Jan.1,2019 Changes in 2019 Changes in 2020 Balance Dec.31,2020
Inventory $20,000 ($20,000) $0 $0
Patent $15,000 ($5,000) ($5,000) $5,000
Goodwill $130,000 $0 ($4,000) $126,000
  $165,000 ($25,000) ($9,000) $131,000

What is the amount of unamortized acquisition differential (excluding unimpaired goodwill) on December 31,
2020?

Ignoring income taxes and any non-controlling interest effects, what is the amount of profit realized during 2020
from the intercompany sale of equipment?

$5,000 (from intercompany realized/unrealized profit table)

What would be the non-controlling interest amount in King's Consolidated Net Income for 2020?

    TOTAL Parent’s portion NCI portion

80% (CI-ATP) 20%
Parent’s net income   $180,000    
Less: dividend revenue ($38,000 × 80%) ($30,400)    
from sub (cost method)
Less: unrealized land   ($6,000)    
gain
Less: unrealized ending   ($3,000)    
inventory profit
Parent’s adjusted net   $140,600 $140,600 $0
income
Sub’s net income $78,000      
Less: after-tax unrealized ($12,000)      
equipment gain (sub
selling)
Add: after-tax realized $3,000      
equipment gain
Add: realized beginning $1,200      
inventory profit
Less: changes in $(9,000)      
acquisition differential
Sub’s adjusted net   $61,200 $48,960 $12,240
income
Consolidated net income   $201,800 $189,560 $12,240

What would be the amount appearing on the December 31, 2020 Consolidated Balance Sheet for land?

King (parent) land $0

Kong (sub) land $25,000
Less: unrealized land gain ($10,000)
Consolidated land $15,000
What would be the amount appearing on the December 31, 2020 Consolidated Balance Sheet for deferred
income taxes?

Intercompany Realized/Unrealized      
Profits During 2020:
King Inc: Before Tax Income tax After Tax
Land–unrealized in 2020 $10,000 $4,000 $6,000
Inventory Sales:      
Unrealized Profits at December 31,      
2020:
$50,000 × 50% = $25,000; $25,000 $5,000 $2,000 $3,000
– ($25,000/1.25) = $5,000
Kong Inc. Before Tax   After Tax
Inventory Sales:      
Realized profits 2020–Beginning $2,000 $800 $1,200
Inventory
       
Equipment sale–Kong to King $20,000 $8,000 $12,000
Unrealized gain
Realized equipment gain–2020 $5,000 $2,000 $3,000
[$20,000/4 years)
Remaining unrealized equipment $15,000 $6,000 $9,000
gain–December 31, 2020

Deferred income tax - $4,000 + $2,000 + $6,000 = $12,000.

What would be the amount appearing on the December 31, 2020 Consolidated Balance Sheet for inventories?

King (parent) inventories $50,000

Kong (sub) inventories $250,000
Less: unrealized ending inventory profit ($5,000)
Consolidated inventories $295,000

What would be the amount appearing on the December 31, 2020 Consolidated Income Statement for cost of
goods sold?

King (parent) Cost of goods sold $400,000

Kong (sub) Cost of goods sold $240,000
Less: intercompany sale ($50,000)
Add: unrealized ending inventory profit $5,000
Less: realized beginning inventory ($2,000)
Consolidated Cost of Goods Sold $593,000