Parent Co. owns 75% of Sub Co. and uses the cost method to account for its investment. The following are summarized income statements for the year ended December 31, Year 7.

Additional Information:

• On July 1, Year 7, Parent purchased all of the outstanding bonds of Sub for $381,250. On that date, Sub had $400,000 of 10% bonds payable outstanding, which mature in five years. The bond discount on the books of Sub on July 1, Year 7, amounted to $20,000. Interest is payable January 1 and July 1. Any gains (losses) are to be allocated to each company. Both companies use the straight-line method to account for bonds.

• Sub Co. did not declare or pay dividends in Year 7.

Required

Prepare a consolidated income statement for Year 7 using a 40% tax rate.

Transcribed Image Text:

INCOME STATEMENTS For Year 7 Parent $ 21,875 Sub Interest revenue Other misc. revenues 900,000 921,875 500,000 500,000 Interest expense Other misc. expenses Income tax expense 44,000 600,000 350,000 124,000 42,000 724,000 $197,875 436,000 Net income $ 64,000