Morgan Company acquires 40% of the voting stock of Kirk Corporation on January 1, 2014, for $60,000,000, and treats it as an equity method investment. At the date of Morgans investment, the fair values of Kirks net assets differed from book values as follows:

Book value Fair value

Merchandise (sold during 2014) $ 5,000,000 $ 8,000,000

Buildings and equipment (20-year life) 30,000,000 40,000,000

Intangible assets (4-year life) 0 10,000,000

Kirk reports total net income of $20,000,000 for the period 2014 - 2017, and $5,000,000 for 2018. Kirk paid no dividends during the period 2014 2017, but paid $1,000,000 in dividends in 2018. The accounting year for both companies ends December 31.

Kirk sells merchandise to Morgan at a markup of 30% on cost (Hint: what is the relationship between markup on cost and gross profit %?). The inventory balances held by Morgan, purchased from Kirk, are as follows.

Inventory held by Morgan, purchased from Kirk

December 31, 2017 $1,560,000

December 31, 2018 2,600,000

Required:

a. Calculate equity in net income of Kirk, reported on Morgans 2018 income statement. (2p.)

b. Calculate Investment in Kirk, reported on Morgans December 31, 2018 balance sheet. (4p.)