CHAPTER 7 (A) Intercompany Profits in Depreciable Assets (B) Intercompany Bondholdings Required (a) Calculate the amount of the gain or the loss that will appear as a separate item on the Year 4 consolidated w statement as a result of the bond transaction that occurred during the year. (b) Prepare the equity method journal entries that Alpha would make on December 31, Year 4, (c) Calculate the amount of the bond liability that will appear on the December 31, Year 4, consolidated statemen financial position. Problem 7-14 LO5, 7 Parent Co. owns 75% of Sub Co. and uses the cost method to account for its investment. The following are summari income statements for the year ended December 31, Year 7. 2013 INCOME STATEMENTS For Year 7 Parent Sub Interest revenue $ 21,875 Other misc. revenues 900,000 500,000 921,875 500,000 Interest expense 44,000 Other misc, expenses 600,000 350,000 Income tax expense 124,000 42,000 724,000 436,000 Net income $197,875 $ 64,000 Additional Information . On July 1, Year 7, Parent purchased all of the outstanding bonds of Sub for $381,250. On that date, Sub ha $400,000 of 10% bonds payable outstanding, which mature in five years. The bond discount on the books of Sub on 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 Prepare a consolidated income statement for Year 7 using a 40% tax rate. 22 Record of Problem 7-15