Here is some information about Company S's Dec. 31, Year 0 balance sheet: Total stockholders' equity:
Question:
Here is some information about Company S's Dec. 31, Year 0 balance sheet:
• Total stockholders' equity: $2,400,000
• Common Stock + APIC: $950,000
• Retained Earnings: $1,450,000.
• Total accumulated depreciation (property plant and equipment): $410,000.
Company S continues to possess this PP&E throughout the duration of this problem.
• The book values of Company S's individual assets and liabilities all equaled their fair values.
On Jan. 1, Year 1, Company P acquired 70% of the outstanding shares of Company S for $1,680,000. Company P uses “fully-adjusted equity method” to account for its investment in Company S. During Year 1:
• On Jan. 1, Year 1, Company S issued $100,000 of 10-year, 10% bonds to Company X (an unrelated party).
• The bonds pay annual interest every December 31 until maturity.
• The bonds were priced to yield 9%, and thus the bonds were sold at $106,417.66.
• On Dec. 31, Year 1 (immediately after Company S made the first interest payment to Company X), Company P acquired the bonds from Company X for $94,462.95.
• Based on this purchase price, the implied yield to maturity on the bonds to Company P is 11%.
• Company S reports net income of $400,000 and declares/distributes cash dividends of $120,000. See next page for Company S Bonds Payable amortization schedule and Company P Bond Investment amortization schedule. During Year 2:
• No intercompany transactions between Company P and Company S. • Company P continues to hold the bonds that it purchased from Company X. • Company S reports net income of $420,000 and declares/distributes cash dividends of $130,000.
[3.1] Prepare Company P's Year 1 equity-method journal entries.
[3.2] Prepare all necessary consolidation entries needed for preparation of the Year 1 consolidated financial statements. [3.3] Prepare Company P's Year 2 equity method journal entries.
[3.4] Prepare all necessary consolidation entries needed for preparation of the Year 2 consolidated financial statements.
Fundamentals of Corporate Finance
ISBN: 978-0077861629
8th edition
Authors: Richard Brealey, Stewart Myers, Alan Marcus