Kho Inc. purchased 90% of the voting shares of Lan Inc. for $600,000 on January 1, 2019. On that date, Lan's common shares and retained earnings were valued at $200,000 and $250,000 respectively. Unless otherwise stated, assume that Kho uses the cost method to account for its investment in Lan Inc. 52 Lan's fair values approximated its carrying values with the following exceptions: Lan's trademark had a fair value which was $50,000 higher than its carrying value Lan's bonds payable had a fair value which was $20,000 higher than their carrying value. The trademark had a useful life of exactly ten years remaining from the date of acquisition. The bonds payable mature on January 1, 2029. Both companies use straight line amortization exclusively. The financial statements of both companies for the year ended December 31, 2020 are shown below: Income Statements Kho Inc. $700,000 $300,000 Lan Inc. $640,000 $160,000 Sales Other Revenues Less: Expenses: Cost of Goods Sold Depreciation Expense Other Expenses Income Tax Expense Net Income $280,000 $30,000 $240,000 $90,000 $360,000 $256,000 $14,000 $155,000 $75,000 $300.000 Retained Earnings Statements Retained Earnings Statements Balance, January 1, 2020 Net Income Less: Dividends Retained Earnings, Dec 31, 2020 Balance Sheets Kho Inc. $200,000 $360,000 ($60,000) $500,000 Lan Inc. $100,000 $300,000 ($50.000) $350,000 Kho Inc. $200,000 $50,000 $50.000 $600,000 $500.000 Lan Inc. $150,000 $150.0001 $150,000 Cash Accounts Receivable Inventory Investment in Lan Inc. Equipment (net) Trademark Total Assets Current Liabilities Bonds Payable Common Shares Retained Earnings Total Liabilities and Equity $1,400.000 $280.000 $120,000 $500.000 $500,000 $1,400,000 $150.000 $200.000 $800,000 $150,000 $100.000 $200.000 $350.000 $800,000 Other Information 19 A goodwill impairment test conducted during August 2020 revealed that the Lan's Goodwill amount on the date of acquisition had been impaired by $10,000 During 2019, Kho sold $50,000 worth of inventory to Lan, half of which was sold to outsiders during the year. During 2020, Kho sold inventory to Lan for $90,000. Two-thirds of this inventory was resold by Lan to outside parties. During 2019, Lan sold $30,000 worth of inventory to Kho, 80% of which was sold to outsiders during the year. During 2020, Lan sold Inventory to Kho for $40,000.75% of this inventory was resold by Kho to outside parties. As of December 31, 2020, kho still owes $20,000 to Lan for the inventory All intercompany sales as well as sales to outsiders earn a gross margin on sales of 20%. The effective tax rate for both companies is 20% Since Kho acquired Lan, Kho has charged Lan an annual management fee of $30,000. Lan has paid Kho for the management services on December 31st of each year, What amount of sales revenue would appear on Kho Inc's consolidated income statement for the year ended December 31, 2020? Multiple Choice O $1,210,000 $1,276,000 $1,340,000 $1,400,000
