On July 1, 2013, Fontaine Company purchased for cash 40% of the outstanding capital stock of Knoblett Company. Both Fontaine Company and Knoblett Company have a December 31 year-end. Knoblett Company, whose common stock is actively traded in the over-the-counter market, reported its total net income for the year to Fontaine Company and also paid cash dividends on November 15, 2013, to Fontaine Company and its other stockholders.

Instructions
How should Fontaine Company report the above facts in its December 31, 2013, balance sheet and its income statement for the year then ended? Discuss the rationale for your answer.