Here is some information about Company S's Dec. 31, Year 0 balance sheet: Total stockholders' equity: $2,400,000 Common Stock + APIC: $950,000 Retained Earnings: $1,450,000. Total accumulated depreciation (property plant and equipment): $410,000. Company S continues to possess this PP&E throughout the duration of this problem. The book values of Company S's individual assets and liabilities all equaled their fair values. On Jan. 1, Year 1, Company P acquired 70% of the outstanding shares of Company S for $1,680,000. Company P uses fully-adjusted equity method to account for its investment in Company S. During Year 1: On Jan. 1, Year 1, Company S issued $100,000 of 10-year, 10% bonds to Company X (an unrelated party). The bonds pay annual interest every December 31 until maturity. The bonds were priced to yield 9%, and thus the bonds were sold at $106,417.66. On Dec. 31, Year 1 (immediately after Company S made the first interest payment to Company X), Company P acquired the bonds from Company X for $94,462.95. Based on this purchase price, the implied yield to maturity on the bonds to Company P is 11%. Company S reports net income of $400,000 and declares/distributes cash dividends of $120,000. See next page for Company S Bonds Payable amortization schedule and Company P Bond Investment amortization schedule. During Year 2: No intercompany transactions between Company P and Company S. Company P continues to hold the bonds that it purchased from Company X. Company S reports net income of $420,000 and declares/distributes cash dividends of $130,000.

[3.1] Prepare Company P's Year 1 equity-method journal entries.

[3.2] Prepare all necessary consolidation entries needed for preparation of the Year 1 consolidated financial statements. [3.3] Prepare Company P's Year 2 equity method journal entries.

[3.4] Prepare all necessary consolidation entries needed for preparation of the Year 2 consolidated financial statements.

Company S Bonds Payable amortization schedule: Interest payment Interest expense Year 0 1 2 3 4 5 Premium Ending Ending amortization premium book value 6,417.66 106,417.66 422.41 5,995.25 105,995.25 460.43 5,534.82 105,534.82 501.87 5,032.95 105,032.95 547.03 4,485.92 104,485.92 596.27 3,889.65 103,889.65 649.93 3,239.72 103,239.72 708.43 2,531.29 102,531.29 772.18 1,759.11 101,759.11 841.68 917.43 100,917.43 917.43 100,000.00 6,417.66 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 100,000 6 7 8 9,577.59 9,539.57 9,498.13 9,452.97 9,403.73 9,350.07 9,291.57 9,227.82 9,158.32 9,082.57 93,582.34 9 10 Company P Bond Investment amortization schedule: Interest payment Interest income Discount amortization Year 1 2 3 4 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 90,000 10,390.92 10,433.93 10,481.66 10,534.64 10,593.45 10,658.73 10,731.19 10,811.62 10,900.90 95,537.05 5 6 7 8 Ending discount 5,537.05 5,146.12 4,712.20 4,230.54 3,695.90 3,102.45 2,443.71 1,712.52 900.90 0.00 390.92 433.93 481.66 534.64 593.45 658.73 731.19 811.62 900.90 5,537.05 Ending investment 94,462.95 94,853.88 95,287.80 95,769.46 96,304.10 96,897.55 97,556.29 98,287.48 99,099.10 100,000.00 9 10 Company S Bonds Payable amortization schedule: Interest payment Interest expense Year 0 1 2 3 4 5 Premium Ending Ending amortization premium book value 6,417.66 106,417.66 422.41 5,995.25 105,995.25 460.43 5,534.82 105,534.82 501.87 5,032.95 105,032.95 547.03 4,485.92 104,485.92 596.27 3,889.65 103,889.65 649.93 3,239.72 103,239.72 708.43 2,531.29 102,531.29 772.18 1,759.11 101,759.11 841.68 917.43 100,917.43 917.43 100,000.00 6,417.66 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 100,000 6 7 8 9,577.59 9,539.57 9,498.13 9,452.97 9,403.73 9,350.07 9,291.57 9,227.82 9,158.32 9,082.57 93,582.34 9 10 Company P Bond Investment amortization schedule: Interest payment Interest income Discount amortization Year 1 2 3 4 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 90,000 10,390.92 10,433.93 10,481.66 10,534.64 10,593.45 10,658.73 10,731.19 10,811.62 10,900.90 95,537.05 5 6 7 8 Ending discount 5,537.05 5,146.12 4,712.20 4,230.54 3,695.90 3,102.45 2,443.71 1,712.52 900.90 0.00 390.92 433.93 481.66 534.64 593.45 658.73 731.19 811.62 900.90 5,537.05 Ending investment 94,462.95 94,853.88 95,287.80 95,769.46 96,304.10 96,897.55 97,556.29 98,287.48 99,099.10 100,000.00 9 10