Fargus Corporation purchases 70% of the voting common stock of Sanatee, Inc. on January 1, 2014 for $9, 240,000. The fair value of the non-controlling interest was $3,960,000. On the acquisition-date, Sanatee had buildings that were undervalued by $200,000 with an expected 10-year life and an undervalued trademark by $1 M with an expected 5-year life. Fargus recorded $155,000 in goodwill from this acquisition. The goodwill is not considered impaired.

On January 1, 2013, Sanatee sold $1,000,000 in ten-year bonds to the public at 98. The bonds pay a 10% interest rate every December 31. Fargus acquired 40% of these bonds on January 1, 2015, paying 103% of the face value. Both companies utilized the straight-line method of amortization.

In January 2014 Sanatee sold equipment to Fargus for $200,000. At the time of the sale, the book value of the equipment was $150,000 with recorded accumulated depreciation of $350,000. The original useful life of the equipment was 10 yearsremaining useful life is 3 years.

Sanatee earned income of $150,000 $160,000 and paid dividends of $45,000 and $48,000 in the years 2014 and 2015, respectively. Fargus earned income from its separate operations (not counting equity income from its investment in Sanatee) of $9,600,000 in 2015.

Assume Fargus applies the equity method in accounting for its investment in Sanatee and that no other intercompany transactions exist in this period.

1. Compute the 5 items you need to eliminate the intercompany debt (interest expense and revenue, the respective book values of the debt and the gain or loss) in 2015.

2.Compute consolidated net income for 2015 and the allocation of income to the non-controlling interest. Hint: Be sure to account for deferred gains and annual gain realizations from the different intra-entity transactions.

3.Compute the carrying value of the investment account on Fargus books related to this investment, and the value of the Non-controlling interest equity account on the consolidated balance sheet as of December 31, 2015.

4.Prepare the consolidation entries related to:

a.The allocation of the accounting acquisition premium (the A entry)

b. The intercompany debt.

c. The intercompany transfer of the equipment. (2 entries)