Parent Co. owns 75% of Sub Co. and uses the cost method to account for its investment.
Question:
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.
Income Statements For Year 7
Parent Sub
Interest Revenue $31,875 -
Other Misc. Revenues 1,000,000 600,000 Total Revenue 1,031,875 600,000 Interest Expense - 54,000 Other Misc. Expenses 700,000 450,000 Income Tax Expense 224,000 52,000 Total Expense 924,000 556,000 Net Income 107,875 44,000
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 of 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:
- Realized gain or loss for entity, Parent and Sub;
- Interest elimination and balance for entity, Parent and Sub;
- Interco interest revenue and expense;
- Calculation of consolidated net income;
- Consolidated Income Statement for Year 7 using a 40% tax rate.