Magna Company is the parent company that owns an 80% interest in Metros Company.
ID: 2526891 • Letter: M
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 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 Metros’s 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.
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
Explanation / Answer
Cash Balance
Magna's cash balance $258,000
Metros's Cash balance $100,000
Less: Cash paid on retirement of bonds -$185,000
Consolidated cash balance $173,000
If option (a) is used, Metros would retire the bond, by paying cash $185,000. Journal entry for retirement of bonds Bonds Payable $200,000 Cash $185,000 Gain on retirement of bonds $15,000 When the carrying value of bonds is more then the cash paid for retirement, there is gain on retirement of Bonds Proforma Consolidated Income statement and balance sheet for 2016 Income statement Sales ($320,000) Cost of Goods sold $220,000 Gross profit ($100,000) Operating Expenses $40,000 Operating Income ($60,000) Interest expenses $20,000 Gain on retirement of Bonds ($15,000) Net Income ($55,000) Balance Sheet Assets: Cash $173,000 Other current assets $250,000 Plant and Equipment $1,300,000 Accumulated Depreciation ($500,000) Total Assets $1,223,000 Liabilities: Current Liabilities $45,000 Non controlling interest $82,000 Common Stock $300,000 Retained Earnings $796,000 Total Liabilities $1,223,000 Working Notes: Non Controlling Interest Common stock $100,000 Retained earnings $285,000 Current year Income $10,000 Gain on retirement of Bonds $15,000 Total $410,000 NCI - 20% $82,000 Retained Earnings Retained Earnings-Magna $746,000 Current year income-Magna $30,000 Retained Earnings-Magna $776,000 Income from Metros Current year Income - 80% $8,000 Gain on retirement of Bonds - 80% $12,000 Share of Magna $20,000 Consolidated Retained Earnings $796,000Related Questions
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