Reference no: EM132036702

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 322 323rate 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. 2. Indicate how your solution to part (1) would change if the second option were used.