Magna Company is the parent company that owns an 80% interest in Metros Company. The interest was purchased at book value, and the simple equity method is used to record the ownership interest. The trial balances of the two companies on December 31, 2016, were as follows:

As of December 31, 2016, Magna Company was considering acquiring the $200,000 of Metros’s 10% bonds from the current owner. Based on a 12% current interest rate for bonds of this risk, the purchase price of the bonds would be $185,000. There are two possible options as follows:

a. Magna could lend $185,000 to Metros at 8% annual interest. Metros would then use the funds to retire the bonds.

b. Magna could buy the bonds and hold them as an investment and enjoy the high interest rate.

Required

1. Prepare a pro forma consolidated income statement and balance sheet for 2016 assuming option (a) is used.

2. Indicate how your solution to part (1) would change if the second option were used.

Transcribed Image Text:

Magna Metros Compan Compan 258,000 50,000 316,000 800,000 (300,000) (40,000) 100,000 200,000 ash ._... . 500,000 (200,000) (5,000) (200,000) (100,000) (285,000) (170,000) 130,000 10,000 20,000 (300,000) 746,000) (150,000) 90,000 30,000 Sales Cost of Goods Sold... xpenses . . . (8,000