On January 2, 20X6, Gernon Shoe Company purchased 40% of Sports Clothing Company (SCC) for $2.0 million cash. Before the acquisition, Gernon had assets of $10 million and stockholders’ equity of $8 million. SCC had stockholders’ equity of $5 million and liabilities of $1 million, and the fair values of its assets and liabilities were equal to their book values.

SCC reported 20X6 net income of $600,000 and declared and paid dividends of $150,000. Assume that Gernon and SCC had no sales to one another. Separate income statements for Gernon and SCC were as follows:

1. Prepare the journal entries for Gernon Shoe (a) to record the acquisition of SCC, and (b) to record its share of SCC net income and dividends for 20X6.
2. Prepare Gernon Shoe’s income statement for 20X6 and calculate the balance in its Investments in SCC account as of December 31, 20X6.
3. Suppose Gernon had purchased 80% of SCC for $4 million. Using the balance sheet equation format, prepare a tabulation of the consolidated balance sheet immediately after acquisition. Prepare the journal entries for both Gernon and SCC to record the acquisition. Omit explanations.
4. Prepare a consolidated income statement for 20X6, using the facts of requirement3.

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Gernon Shoe Company Sports Clothing Company Sales Expenses Operating income $12,500,000 11,100,000 $1,400,000 $4,600,000 4,000,000 $ 600,000