Income statements of M Co and K Co for the year ended December 31, Year 9, are presented below M Co K Co Sales $ 600,000 $ 350,000 Rent revenue 50,000 Interest revenue 6,700 Income from subsidiary 30,320 Gain on land sale 8,000 637,020 408,000 Cost of goods sold 334,000 225,000 Distribution expense 80,000 70,000 Administrative expense 147,000 74,000 Interest expense 1,700 6,000 Income tax expense 20,700 7,500 583,400 382,500 Profit $ 53,620 $ 25,500 Additional Information M Co uses the equity method to account for its investment in K Co M Co acquired its 80 interest in K Co on January 1, Year 4 On that date, the acquisition differential of $25,000 was allocated entirely to buildings it is being amortized over a 20 year period Amortization expense is grouped with distribution expenses, and impairment losses, if any, are grouped with other expenses M Co made an advance of $100,000 to K Co on July 1, Year 9 This loan is due on demand and requires the payment of interest at 12 per year M Co rents marine equipment from K Co During Year 9, $50,000 rent was paid and was charged to administrative expense In Year 7, M Co sold land to K Co and recorded a profit of $10,000 on the sale K Co held the land until October, Year 9, when it was sold to an unrelated company During Year 9, K Co made sales to M Co totalling $90,000 The December 31, Year 9, inventories of M Co contain an unrealized profit of $5,000 The January 1, Year 9, inventories of M Co contained an unrealized profit of $12,000 On January 1, Year 7, M Co sold machinery to K Co and recorded a profit of $13,000 The remaining useful life on that date was five years Assume straight line depreciation K Co paid dividends of $20,000 during Year 9 Tax allocation is to be used, assuming a 40 average corporate tax rate for this purpose Required (a) Prepare a consolidated income statement for Year 9 (b) Now assume that M Co is a private company, uses ASPE, and chooses to use the cost method to report its investment in K Co Prepare M Co s income statement for Year 9 under the cost method Expert Answer

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Income statements of M Co. and K Co. for the year ended December 31, Year 9, are presented below: M Co. K Co. Sales $

Income statements of M Co. and K Co. for the year ended December 31, Year 9, are presented below:

	M Co.		K Co.
Sales	$	600,000	$	350,000
Rent revenue				50,000
Interest revenue		6,700
Income from subsidiary		30,320
Gain on land sale				8,000
		637,020		408,000
Cost of goods sold		334,000		225,000
Distribution expense		80,000		70,000
Administrative expense		147,000		74,000
Interest expense		1,700		6,000
Income tax expense		20,700		7,500
		583,400		382,500
Profit	$	53,620	$	25,500

Additional Information

M Co. uses the equity method to account for its investment in K Co.
M Co. acquired its 80% interest in K Co. on January 1, Year 4. On that date, the acquisition differential of $25,000 was allocated entirely to buildings; it is being amortized over a 20-year period.
Amortization expense is grouped with distribution expenses, and impairment losses, if any, are grouped with other expenses.
M Co. made an advance of $100,000 to K Co. on July 1, Year 9. This loan is due on demand and requires the payment of interest at 12% per year.
M Co. rents marine equipment from K Co. During Year 9, $50,000 rent was paid and was charged to administrative expense.
In Year 7, M Co. sold land to K Co. and recorded a profit of $10,000 on the sale. K Co. held the land until October, Year 9, when it was sold to an unrelated company.
During Year 9, K Co. made sales to M Co. totalling $90,000. The December 31, Year 9, inventories of M Co. contain an unrealized profit of $5,000. The January 1, Year 9, inventories of M Co. contained an unrealized profit of $12,000.
On January 1, Year 7, M Co. sold machinery to K Co. and recorded a profit of $13,000. The remaining useful life on that date was five years. Assume straight-line depreciation.
K Co. paid dividends of $20,000 during Year 9.
Tax allocation is to be used, assuming a 40% average corporate tax rate for this purpose.

Required: (a) Prepare a consolidated income statement for Year 9.

(b) Now assume that M Co. is a private company, uses ASPE, and chooses to use the cost method to report its investment in K Co. Prepare M Co.s income statement for Year 9 under the cost method.

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