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 & ext { Ting Corp. } & ext { Won Corp. } \\hline ext { Sales } & \$ 1,000,000 & \$ 600,000 \\hline ext { Other Revenues } & \$ 600,000 & \$ 240,000 \\hline ext { Less: Expenses } & & \\hline ext { Cost of Goods Sold } & \$ 800,000 & \$ 480,000 \\hline ext { Depreciation Expense } & \$ 40,000 & \$ 20,000 \\hline ext { Other Expenses } & \$ 160,000 & \$ 80,000 \\hline ext { Income Tax Expense } & \$ 240,000 & \$ 104,000 \\hline ext { 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 & ext { Ting Corp } & ext { Won Corp } \\hline ext { Balance, January 1, 2020 } & \$ 400,000 & \$ 700,000 \\hline ext { Net Income } & \$ 360,000 & \$ 156,000 \\hline ext { Less: Dividends } & (\$ 60,000) & \$ 76,000) \\hline ext { 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 & ext { Ting Corp } & ext { Won Corp. } \\hline ext { Cash } & \$ 339,250 & \$ 50,000 \\hline ext { Accounts Receivable } & \$ 500,000 & \$ 500,000 \\hline ext { Inventory } & \$ 100,000 & \$ 500,000 \\hline ext { Investment in Won Corp. } & \$ 1,500,000 & \\hline \begin{array}{l} ext { Investment in Won Corp. } \ ext { bonds }\end{array} & \$ 60,750 & \\hline ext { Land } & & \$ 50,000 \\hline ext { Equipment } & \$ 1,000,000 & \$ 450,000 \\hline ext { Accumulated Depreciation } & (\$ 500,000) & (\$ 300,000) \\hline ext { Total Assets } & \$ 3,000,000 & \$ 1,250,000 \\hline ext { Current Liabilities } & \$ 1,300,000 & \$ 119,000 \\hline ext { Bonds Payable } & & \$ 150,000 \\hline ext { Less: Bond Discount } & & (\$ 19,000) \\hline ext { Common Shares } & \$ 1,000,000 & \$ 220,000 \\hline ext { Retained Earnings } & \$ 700,000 & \$ 780,000 \\hline ext { 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.Ignoring income taxes, what is the amount of profit/(loss) realized during 2020 from the intercompany sale of equipment?A) $4,000 lossB) $2,800 gainC) $4,000 gainD) $20,000 gain

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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  &  	ext { Ting Corp. }  &  	ext { Won Corp. } \\hline 	ext { Sales }  &  \$ 1,000,000  &  \$ 600,000 \\hline 	ext { Other Revenues }  &  \$ 600,000  &  \$ 240,000 \\hline 	ext { Less: Expenses }  &   &  \\hline 	ext { Cost of Goods Sold }  &  \$ 800,000  &  \$ 480,000 \\hline 	ext { Depreciation Expense }  &  \$ 40,000  &  \$ 20,000 \\hline 	ext { Other Expenses }  &  \$ 160,000  &  \$ 80,000 \\hline 	ext { Income Tax Expense }  &  \$ 240,000  &  \$ 104,000 \\hline 	ext { 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  &  	ext { Ting Corp }  &  	ext { Won Corp } \\hline 	ext { Balance, January 1, 2020 }  &  \$ 400,000  &  \$ 700,000 \\hline 	ext { Net Income }  &  \$ 360,000  &  \$ 156,000 \\hline 	ext { Less: Dividends }  &  (\$ 60,000)   &  \$ 76,000)  \\hline 	ext { 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 &  	ext { Ting Corp }  &  	ext { Won Corp. } \\hline 	ext { Cash }  &  \$ 339,250  &  \$ 50,000 \\hline 	ext { Accounts Receivable }  &  \$ 500,000  &  \$ 500,000 \\hline 	ext { Inventory }  &  \$ 100,000  &  \$ 500,000 \\hline 	ext { Investment in Won Corp. }  &  \$ 1,500,000  &  \\hline \begin{array}{l}	ext { Investment in Won Corp. } \	ext { bonds }\end{array}  &  \$ 60,750  &  \\hline 	ext { Land }  &   &  \$ 50,000 \\hline 	ext { Equipment }  &  \$ 1,000,000  &  \$ 450,000 \\hline 	ext { Accumulated Depreciation }  &  (\$ 500,000)   &  (\$ 300,000)  \\hline 	ext { Total Assets }  &  \$ 3,000,000  &  \$ 1,250,000 \\hline 	ext { Current Liabilities }  &  \$ 1,300,000  &  \$ 119,000 \\hline 	ext { Bonds Payable }  &   &  \$ 150,000 \\hline 	ext { Less: Bond Discount }  &   &  (\$ 19,000)  \\hline 	ext { Common Shares }  &  \$ 1,000,000  &  \$ 220,000 \\hline 	ext { Retained Earnings }  &  \$ 700,000  &  \$ 780,000 \\hline 	ext { 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.Ignoring income taxes, what is the amount of profit/(loss)  realized during 2020 from the intercompany sale of equipment?A)  $4,000 lossB)  $2,800 gainC)  $4,000 gainD)  $20,000 gain

Heather Robertson · Accepted Answer

Final Answer : A, Explanation :  The loss realized from the intercompany sale of equipment is $4,000. This is calculated by considering the $20,000 lower sale price than its book value and spreading this loss over the remaining useful life of the equipment (5 years), resulting in a $4,000 loss per year.

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