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. Page 9 of 10 Company S Bonds Payable amortization schedule: Interest Interest Premium Ending Ending Year payment expense amortization premium book value 0 6,417.66 106,417.66 1 10,000 9,577.59 422.41 5,995.25 105,995.25 2 10,000 9,539.57 460.43 5,534.82 105,534.82 3 10,000 9,498.13 501.87 5,032.95 105,032.95 4 10,000 9,452.97 547.03 4,485.92 104,485.92 5 10,000 9,403.73 596.27 3,889.65 103,889.65 6 10,000 9,350.07 649.93 3,239.72 103,239.72 7 10,000 9,291.57 708.43 2,531.29 102,531.29 8 10,000 9,227.82 772.18 1,759.11 101,759.11 9 10,000 9,158.32 841.68 917.43 100,917.43 10 10,000 9,082.57 917.43 - 100,000.00 100,000 93,582.34 6,417.66 Company P Bond Investment amortization schedule: Interest Interest Discount Ending Ending Year payment income amortization discount investment 1 5,537.05 94,462.95 2 10,000 10,390.92 390.92 5,146.12 94,853.88 3 10,000 10,433.93 433.93 4,712.20 95,287.80 4 10,000 10,481.66 481.66 4,230.54 95,769.46 5 10,000 10,534.64 534.64 3,695.90 96,304.10 6 10,000 10,593.45 593.45 3,102.45 96,897.55 7 10,000 10,658.73 658.73 2,443.71 97,556.29 8 10,000 10,731.19 731.19 1,712.52 98,287.48 9 10,000 10,811.62 811.62 900.90 99,099.10 10 10,000 10,900.90 900.90 0.00 100,000.00 90,000 95,537.05 5,537.05 Page 10 of 10 Problem 4 Here is some information about Company S's Dec. 31, Year 0 balance sheet: • Total stockholders' equity: $3,000,000 • Common Stock + APIC: $1,000,000 • Retained Earnings: $2,000,000. • Total accumulated depreciation (property plant and equipment): $500,000. 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 85% of the outstanding shares of Company S for $2,550,000. Company P uses “fully-adjusted equity method” to account for its investment in Company S. During Year 1: • Company P sells land (with original cost of $72,000) to Company S for $96,000. Company S still has this land at the end of Year 1. • Company S reports net income of $390,000 and declares/distributes dividends of $140,000. During Year 2: • No intercompany transactions between Company P and Company S. • Company S continues to hold on to the land. • Company S reports net income of $360,000 and declares/distributes dividends of $150,000. During Year 3: • Company S sells the land to an outside party for $114,000. • Company S reports net income of $280,000 (this amount includes Company S's gain on land sale) and declares/distributes cash dividends of $110,000. [4.1] Prepare all necessary consolidation entries needed for preparation of the Year 1 consolidated financial statements. [4.2] Prepare all necessary consolidation entries needed for preparation of the Year 2 consolidated financial statements. [4.3] Prepare all necessary consolidation entries needed for preparation of the Year 3 consolidated financial statements.