On July 1, 2012, Kathy Company Inc acquired 70 of the 1,000,000 outstanding common shares of Lucys Linens Ltd (Lucys) for $3,500,000 On that date, shares of Lucys were trading on the national stock exchange for $4 per share Lucys shareholders equity consisted of common shares of $125,000 and retained earnings of $2,250,000 On the acquisition date, it was agreed that all of Lucys assets and liabilities were fairly valued except for some inventory which was undervalued by $50,000 and some equipment which was undervalued by $250,000 The inventory on hand on the acquisition date was sold by the middle of 2013 and the equipment had a remaining useful life of ten years Goodwill was assessed for impairment each year and impairment was determined to have occurred as follows 2014 2018 Controlling interest in goodwill $400,000 $200,000 Noncontrolling interest in goodwill $150,000 $ 50,000 Kathy Company Inc uses the cost method to account for its investment in Lucys and values the noncontrolling interest in its subsidiary musing the fair value enterprise method, based on the market value of its shares on the acquisition date During 2018, Kathy Company purchased inventory from Lucys at a cost of $2,000,000 Kathy Companys inventories contained merchandise purchased from Lucys at a price of $400,000 at December 31, 2017, and $500,000 at December 31, 2018 Lucys prices the inventory to earn a gross profit of 40 On January 1, 2016, Kathy Company Inc sold some equipment to Lucys for $500,000, recording a pre tax gain of $100,000 on the sale The equipment had a remaining life of four years at the date of the intercompany sale Kathy Company charges Lucys $25,000 per month for management fees The management fees for November and December 2018 were unpaid at December 31, 2018 Both companies pay income taxes at a marginal rate of 30 The financial statements for the two companies for 2018 follow Required Prepare a consolidated statement of income and retained earnings for Kathy Company Inc and its subsidiary, Lucys Linens Ltd , for the year ended December 31, 2018 Calculate each of the following balances that would appear in Kathy Company Inc s consolidated statement of financial position as at December 31, 2018 Accounts receivable Inventory Deferred income tax asset Noncontrolling interest Calculate the amount of investment income that Kathy Company Inc would report from its investment in Lucys Linens Ltd for the year ended December 31, 2018, if Kathy Company prepared single company financial statements and used the equity method to account for and report its interest in its subsidiary STATEMENTS OF ANARKIALPOSTION Cash Accounts receivable Irwentory Capital assets (net) Inwestment in Lucy's Linens Lit Kathry Company 670,000 1,400,000 1,700,000 2,170,000 3,500,000 $ 9,440,000 Lucy's Linens Ltd 390,000 525,000 1,290,000 1,505,000 $ 3,710,000 $ Accounts payable Dividers payable Long term debut Common shares Retained earnings 1,200,000 400,000 1,550,000 500,000 5,290,000 9,440,000 170,000 200,000 515,000 125,000 2,700,000 3,710,000 $ STATEMENTS OF NCOME AND RETAINED EARNINGS Lucy's Linens Ltd $ 3,720,000 1,610,000 2,090,000 Kathy Company Sales $ 10,950,000 Cost of sales 7,400,000 Gross profit 3,550,000 Other reverwe 810,000 Amortization expense 420,000 Other expenses 2,660,000 Income tax expense 400,000 Net income 890,000 Retained earnings, Jaruary 1, 2018 5,210,000 Dividericks declared (800,000) Retained earnings, December 31, 2018 $ 5,290,000 210,000 1,020,000 340,000 510,000 2,590,000 (400,000) 2,700,000 $ STATEMENTS OF ANARKIALPOSTION Cash Accounts receivable Irwentory Capital assets (net) Inwestment in Lucy's Linens Lit Kathry Company 670,000 1,400,000 1,700,000 2,170,000 3,500,000 $ 9,440,000 Lucy's Linens Ltd 390,000 525,000 1,290,000 1,505,000 $ 3,710,000 $ Accounts payable Dividers payable Long term debut Common shares Retained earnings 1,200,000 400,000 1,550,000 500,000 5,290,000 9,440,000 170,000 200,000 515,000 125,000 2,700,000 3,710,000 $ STATEMENTS OF NCOME AND RETAINED EARNINGS Lucy's Linens Ltd $ 3,720,000 1,610,000 2,090,000 Kathy Company Sales $ 10,950,000 Cost of sales 7,400,000 Gross profit 3,550,000 Other reverwe 810,000 Amortization expense 420,000 Other expenses 2,660,000 Income tax expense 400,000 Net income 890,000 Retained earnings, Jaruary 1, 2018 5,210,000 Dividericks declared (800,000) Retained earnings, December 31, 2018 $ 5,290,000 210,000 1,020,000 340,000 510,000 2,590,000 (400,000) 2,700,000 $

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On July 1, 2012, Kathy Company Inc. acquired 70% of the 1,000,000 outstanding common shares of Lucys Linens Ltd. (Lucys) for $3,500,000. On that date,

On July 1, 2012, Kathy Company Inc. acquired 70% of the 1,000,000 outstanding common shares of Lucys Linens Ltd. (Lucys) for $3,500,000. On that date, shares of Lucys were trading on the national stock exchange for $4 per share. Lucys shareholders equity consisted of common shares of $125,000 and retained earnings of $2,250,000.

On the acquisition date, it was agreed that all of Lucys assets and liabilities were fairly valued except for some inventory which was undervalued by $50,000 and some equipment which was undervalued by $250,000. The inventory on hand on the acquisition date was sold by the middle of 2013 and the equipment had a remaining useful life of ten years.

Goodwill was assessed for impairment each year and impairment was determined to have occurred as follows:

2014 2018

Controlling interest in goodwill $400,000 $200,000

Noncontrolling interest in goodwill $150,000 $ 50,000

Kathy Company Inc. uses the cost method to account for its investment in Lucys and values the noncontrolling interest in its subsidiary musing the fair value enterprise method, based on the market value of its shares on the acquisition date.

During 2018, Kathy Company purchased inventory from Lucys at a cost of $2,000,000. Kathy Companys inventories contained merchandise purchased from Lucys at a price of $400,000 at December 31, 2017, and $500,000 at December 31, 2018. Lucys prices the inventory to earn a gross profit of 40%.

On January 1, 2016, Kathy Company Inc. sold some equipment to Lucys for $500,000, recording a pre-tax gain of $100,000 on the sale. The equipment had a remaining life of four years at the date of the intercompany sale.

Kathy Company charges Lucys $25,000 per month for management fees. The management fees for November and December 2018 were unpaid at December 31, 2018.

Both companies pay income taxes at a marginal rate of 30%.

The financial statements for the two companies for 2018 follow:

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Required:

Prepare a consolidated statement of income and retained earnings for Kathy Company Inc. and its subsidiary, Lucys Linens Ltd., for the year ended December 31, 2018.
Calculate each of the following balances that would appear in Kathy Company Inc.s consolidated statement of financial position as at December 31, 2018:

Accounts receivable
Inventory
Deferred income tax asset
Noncontrolling interest

Calculate the amount of investment income that Kathy Company Inc. would report from its investment in Lucys Linens Ltd. for the year ended December 31, 2018, if Kathy Company prepared single-company financial statements and used the equity method to account for and report its interest in its subsidiary.

STATEMENTS OF ANARKIALPOSTION Cash Accounts receivable Irwentory Capital assets (net) Inwestment in Lucy's Linens Lit. Kathry Company 670,000 1,400,000 1,700,000 2,170,000 3,500,000 $ 9,440,000 Lucy's Linens Ltd. 390,000 525,000 1,290,000 1,505,000 $ 3,710,000 $ Accounts payable Dividers payable Long-term debut Common shares Retained earnings 1,200,000 400,000 1,550,000 500,000 5,290,000 9,440,000 170,000 200,000 515,000 125,000 2,700,000 3,710,000 $ STATEMENTS OF NCOME AND RETAINED EARNINGS Lucy's Linens Ltd. $ 3,720,000 1,610,000 2,090,000 Kathy Company Sales $ 10,950,000 Cost of sales 7,400,000 Gross profit 3,550,000 Other reverwe 810,000 Amortization expense 420,000 Other expenses 2,660,000 Income tax expense 400,000 Net income 890,000 Retained earnings, Jaruary 1, 2018 5,210,000 Dividericks declared (800,000) Retained earnings, December 31, 2018 $ 5,290,000 210,000 1,020,000 340,000 510,000 2,590,000 (400,000) 2,700,000 $ STATEMENTS OF ANARKIALPOSTION Cash Accounts receivable Irwentory Capital assets (net) Inwestment in Lucy's Linens Lit. Kathry Company 670,000 1,400,000 1,700,000 2,170,000 3,500,000 $ 9,440,000 Lucy's Linens Ltd. 390,000 525,000 1,290,000 1,505,000 $ 3,710,000 $ Accounts payable Dividers payable Long-term debut Common shares Retained earnings 1,200,000 400,000 1,550,000 500,000 5,290,000 9,440,000 170,000 200,000 515,000 125,000 2,700,000 3,710,000 $ STATEMENTS OF NCOME AND RETAINED EARNINGS Lucy's Linens Ltd. $ 3,720,000 1,610,000 2,090,000 Kathy Company Sales $ 10,950,000 Cost of sales 7,400,000 Gross profit 3,550,000 Other reverwe 810,000 Amortization expense 420,000 Other expenses 2,660,000 Income tax expense 400,000 Net income 890,000 Retained earnings, Jaruary 1, 2018 5,210,000 Dividericks declared (800,000) Retained earnings, December 31, 2018 $ 5,290,000 210,000 1,020,000 340,000 510,000 2,590,000 (400,000) 2,700,000 $