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 \begin{array}{|l|r|r|}\hline & ext { King Corp. } & ext { Kong Corp. } \\hline ext { Sales } & \$ 500,000 & \$ 300,000 \\hline ext { Other Revenues } & \$ 300,000 & \$ 120,000 \\hline ext { Less: Expenses } & & \\hline ext { Cost of Goods Sold } & \$ 400,000 & \$ 240,000 \\hline ext { Depreciation Expense } & \$ 20,000 & \$ 10,000 \\hline ext { Other Expenses } & \$ 80,000 & \$ 40,000 \\hline ext { Income Tax Expense } & \$ 120,000 & \$ 52,000 \\hline ext { Net Income } & \$ 180,000 & \$ 78,000 \\hline\end{array} Sales Other Revenues Less: Expenses Cost of Goods Sold Depreciation Expense Other Expenses Income Tax Expense Net Income King Corp. $500 , 000 $300 , 000 $400 , 000 $20 , 000 $80 , 000 $120 , 000 $180 , 000 Kong Corp. $300 , 000 $120 , 000 $240 , 000 $10 , 000 $40 , 000 $52 , 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 \begin{array}{|l|r|r|}\hline & ext { King Corp } & ext { Kong Corp } \\hline ext { Balance, January 1, 2020 } & \$ 250,000 & \$ 350,000 \\hline ext { Net Income } & \$ 180,000 & \$ 78,000 \\hline ext { Less: Dividends } & (\$ 30,000) & ( \$ 38,000) \\hline ext { Retained Earnings } & \$ 400,000 & \$ 390,000 \\hline\end{array} Balance, January 1, 2020 Net Income Less: Dividends Retained Earnings King Corp $250 , 000 $180 , 000 ( $30 , 000 ) $400 , 000 Kong Corp $350 , 000 $78 , 000 ( $38 , 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 \begin{array}{|l|r|r|}\hline & ext { King Corp } & ext { Kong Corp } \\hline ext { Cash } & \$ 50,000 & \$ 25,000 \\hline ext { Accounts Receivable } & \$ 100,000 & \$ 250,000 \\hline ext { Inventory } & \$ 50,000 & \$ 250,000 \\hline ext { Investment in Kong Corp. } & \$ 500,000 & \\hline ext { Land } & & \$ 25,000 \\hline ext { Equipment } & \$ 400,000 & \$ 200,000 \\hline ext { Accumulated Depreciation } & (\$ 250,000) & (\$ 150,000) \\hline ext { Total Assets } & \$ 850,000 & \$ 600,000 \\hline ext { Current Liabilities } & \$ 320,000 & \$ 62,000 \\hline ext { Dividends Payable } & \$ 30,000 & \$ 38,000 \\hline ext { Common Shares } & \$ 100,000 & \$ 110,000 \\hline ext { Retained Earnings } & \$ 400,000 & \$ 390,000 \\hline ext { Total Liabilities and Equity } & \$ 850,000 & \$ 600,000 \\hline\end{array} Cash Accounts Receivable Inventory Investment in Kong Corp. Land Equipment Accumulated Depreciation Total Assets Current Liabilities Dividends Payable Common Shares Retained Earnings Total Liabilities and Equity King Corp $50 , 000 $100 , 000 $50 , 000 $500 , 000 $400 , 000 ( $250 , 000 ) $850 , 000 $320 , 000 $30 , 000 $100 , 000 $400 , 000 $850 , 000 Kong Corp $25 , 000 $250 , 000 $250 , 000 $25 , 000 $200 , 000 ( $150 , 000 ) $600 , 000 $62 , 000 $38 , 000 $110 , 000 $390 , 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 amount of unamortized acquisition differential (excluding unimpaired goodwill) on December 31, 2020?A) $4,000B) $5,000C) $8,000D) $10,000

Question

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 \begin{array}{|l|r|r|}\hline  &  	ext { King Corp. }  &  	ext { Kong Corp. } \\hline 	ext { Sales }  &  \$ 500,000  &  \$ 300,000 \\hline 	ext { Other Revenues }  &  \$ 300,000  &  \$ 120,000 \\hline 	ext { Less: Expenses }  &   &  \\hline 	ext { Cost of Goods Sold }  &  \$ 400,000  &  \$ 240,000  \\hline 	ext { Depreciation Expense }  &  \$ 20,000  &  \$ 10,000 \\hline 	ext { Other Expenses }  &  \$ 80,000  &  \$ 40,000 \\hline 	ext { Income Tax Expense }  &  \$ 120,000  &  \$ 52,000 \\hline 	ext { Net Income }  &  \$ 180,000  &  \$ 78,000 \\hline\end{array}  Sales   Other Revenues   Less: Expenses   Cost of Goods Sold   Depreciation Expense   Other Expenses   Income Tax Expense   Net Income  ​  King Corp.  $500 , 000 $300 , 000 $400 , 000 $20 , 000 $80 , 000 $120 , 000 $180 , 000 ​  Kong Corp.  $300 , 000 $120 , 000 $240 , 000 $10 , 000 $40 , 000 $52 , 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 \begin{array}{|l|r|r|}\hline  &  	ext { King Corp }  &  	ext { Kong Corp } \\hline 	ext { Balance, January 1, 2020 }  &  \$ 250,000  &  \$ 350,000 \\hline 	ext { Net Income }  &  \$ 180,000  &  \$ 78,000 \\hline 	ext { Less: Dividends }  &  (\$ 30,000)   & ( \$ 38,000)  \\hline 	ext { Retained Earnings }  &  \$ 400,000  &  \$ 390,000 \\hline\end{array}  Balance, January 1, 2020   Net Income   Less: Dividends   Retained Earnings  ​  King Corp  $250 , 000 $180 , 000 ( $30 , 000 )  $400 , 000 ​  Kong Corp  $350 , 000 $78 , 000 ( $38 , 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 \begin{array}{|l|r|r|}\hline  &  	ext { King Corp }  &  	ext { Kong Corp } \\hline 	ext { Cash }  &  \$ 50,000  &  \$ 25,000 \\hline 	ext { Accounts Receivable }  &  \$ 100,000  &  \$ 250,000 \\hline 	ext { Inventory }  &  \$ 50,000  &  \$ 250,000 \\hline 	ext { Investment in Kong Corp. }  &  \$ 500,000  &  \\hline 	ext { Land }  &   &  \$ 25,000 \\hline 	ext { Equipment }  &  \$ 400,000  &  \$ 200,000 \\hline 	ext { Accumulated Depreciation }  &  (\$ 250,000)   &  (\$ 150,000)  \\hline 	ext { Total Assets }  &  \$ 850,000  &  \$ 600,000 \\hline 	ext { Current Liabilities }  &  \$ 320,000  &  \$ 62,000 \\hline 	ext { Dividends Payable }  &  \$ 30,000  &  \$ 38,000 \\hline 	ext { Common Shares }  &  \$ 100,000  &  \$ 110,000 \\hline 	ext { Retained Earnings }  &  \$ 400,000  &  \$ 390,000 \\hline 	ext { Total Liabilities and Equity }  &  \$ 850,000  &  \$ 600,000 \\hline\end{array}  Cash   Accounts Receivable   Inventory   Investment in Kong Corp.   Land   Equipment   Accumulated Depreciation   Total Assets   Current Liabilities   Dividends Payable   Common Shares   Retained Earnings   Total Liabilities and Equity  ​  King Corp  $50 , 000 $100 , 000 $50 , 000 $500 , 000 $400 , 000 ( $250 , 000 )  $850 , 000 $320 , 000 $30 , 000 $100 , 000 $400 , 000 $850 , 000 ​  Kong Corp  $25 , 000 $250 , 000 $250 , 000 $25 , 000 $200 , 000 ( $150 , 000 )  $600 , 000 $62 , 000 $38 , 000 $110 , 000 $390 , 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 amount of unamortized acquisition differential (excluding unimpaired goodwill)  on December 31, 2020?A)  $4,000B)  $5,000C)  $8,000D)  $10,000

Tasia Wilson · Accepted Answer

Final Answer : B, Explanation :  The acquisition differential is calculated based on the fair value adjustments at the time of acquisition and their subsequent amortization or realization. The inventory fair value adjustment of $20,000 was realized in 2019 when the inventory was sold to outsiders. The patent with a fair value of $15,000 had an estimated useful life of 3 years, leading to annual amortization of $5,000 ($15,000 / 3 years). By the end of 2020, two years have passed since the acquisition, so $10,000 of the patent's value has been amortized, leaving an unamortized acquisition differential of $5,000 for the patent.

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