Question
Magna Company is the parent company that owns an 80% interest in Metros Company. The interest was purchased at book value, and the simple equity
Magna Company is the parent company that owns an 80% interest in Metros Company. The interest was purchased at book value, and the simple equity method is used to record the ownership interest. The trial balances of the two companies on December 31, 2016, were as follows:
| Magna Company | Metros Company |
---|---|---|
Cash | 258,000 | 100,000 |
Other Current Assets | 50,000 | 200,000 |
Investment in Metros | 316,000 |
|
Plant and Equipment | 800,000 | 500,000 |
Accumulated Depreciation | (300,000) | (200,000) |
Current Liabilities | (40,000) | (5,000) |
Bonds Payable |
| (200,000) |
Common Stock (par) | (300,000) | (100,000) |
Retained Earnings | (746,000) | (285,000) |
Sales | (150,000) | (170,000) |
Cost of Goods Sold | 90,000 | 130,000 |
Expenses | 30,000 | 10,000 |
Interest Expense |
| 20,000 |
Subsidiary Income | (8,000) |
|
Totals | 0 | 0 |
As of December 31, 2016, Magna Company was considering acquiring the $200,000 of Metross 10% bonds from the current owner. Based on a 12% current interest rate for bonds of this risk, the purchase price of the bonds would be $185,000. There are two possible options as follows:
a. Magna could lend $185,000 to Metros at 8% annual interest. Metros would then use the funds to retire the bonds.
b. Magna could buy the bonds and hold them as an investment and enjoy the high interest rate.
Required
1. Prepare a pro forma consolidated income statement and balance sheet for 2016 assuming option (a) is used.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started