On January 1, 2024, Paxton Company purchased a 70% interest in Sagon Company for $1,300,000, at which time Sagon Company had retained earnings of $500,000 and capital stock of $1,000,000. On January 1, 2024, the fair value of the assets and liabilities of Sagon Company was equal to their book value except for bonds payable. Sagon Company had outstanding a $1,000,000 issue of 6% bonds that were issued at par and that mature on January 1, 2029. Interest on the bonds is payable annually, and the yield rate on similar bonds on January 1, 2024, is 10%. Paxton Company reported net income from independent operations of $300,000 in 2024 and $250,000 in 2025. Sagon Company reported net income of $100,000 in 2024 and $120,000 in 2025. Neither company paid or declared dividends in 2024 or 2025. Paxton uses the partial equity method to account for its investment in Santos. Despite two profitable years, changes in the market during 2025 for Sagon’s product line have caused Paxton to be concerned about the future profitability of the unit. The following data are collected to test for goodwill impairment at 12/31/25. (No goodwill impairment has been recorded on the parent’s books.)
Paxton chose to measure goodwill impairment using the present value of future cash flows to estimate the fair value of the reporting unit (Sagon).

Required:

A. Prepare in general journal form the entries necessary in the consolidated statements workpapers for the years ended December 31, 2024, and December 31, 2025.

B. Prepare in good form a schedule or t- account showing the calculation of the controlling and noncontrolling interest in consolidated net income for the years ended December 31, 2024, and December 31, 2025.

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Present Value of Future Cash Flows Carrying Value of Sagon's Identifiable Net Assets* $1,409,000 Year 2025 $1,500,000 * Identifiable Net Assets do not include goodwill. Fair Value of Sagon's Identifiable Net Assets $1,320,000