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

Multiple Choice

• $5,000

• $2,000

• $10,000

• $7,000