Question $3$

Parent Co$.$ owns $75\%$ of Sub Co$.$ and uses the cost method to account for its investment. The following are summarized income statements for the year ended December $31,$ Year $7.$

INCOME STATEMENTS

For Year $7$

Parent Sub

Interest revenue $ $21,875$ $

Other misc. revenues $900,000500,000$

$921,875500,000$

Interest expense $44,000$

Other misc. expenses $600,000350,000$

Income tax expense $124,00042,000$

$724,000436,000$

Net income $ $197,875$ $ $64,000$

$\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_$

Additional Information

On July $1,$ Year $7,$ Parent purchased all of the outstanding bonds of Sub for $$381,250.$ On that date, Sub had $$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. Show all your workings.