On July 1, 2011, Fontaine Company purchased for cash 40% of the outstanding ordinary shares of Knoblett Company. Both Fontaine Company and Knoblett Company have a December 31 year-end. Knoblett Company, whose shares are actively traded in the over-the-counter market, reported its total net income for the year to Fontaine Company and also paid cash dividends on November 15, 2011, to Fontaine Company and its other shareholders.
How should Fontaine Company report the above facts in its December 31, 2011, statement of financial position and its income statement for the year then ended? Discuss the rationale for your answer.