Question

Problem 5-18 (LO 5-1, 5-3, 5-4, 5-5, 5-6, 5-7) Placid Lake Corporation acquired 90 percent of the outstanding voting stock of Scenic, Inc., on January 1, 2017, when Scenic had a net book value of $460,000. Any excess fair value was assigned to intangible assets and amortized at a rate of $4,000 per year. Placid Lake's 2018 net income before consideration of its relationship with Scenic (and before adjustments for intra-entity sales) was $360,000. Scenic reported net income of $170,000. Placid Lake declared $160,000 in dividends during this period; Scenic paid $46,000. At the end of 2018, selected figures from the two companies' balance sheets were as follows: Placid Lake Scenic Inventory $ 200,000 $ 96,000 Land 660,000 260,000 Equipment (net) 460,000 360,000 During 2017, intra-entity sales of $105,000 (original cost of $54,000) were made. Only 30 percent of this inventory was still held within the consolidated entity at the end of 2017. In 2018, $150,000 in intra-entity sales were made with an original cost of $65,000. Of this merchandise, 40 percent had not been resold to outside parties by the end of the year. Each of the following questions should be considered as an independent situation for the year 2018. What is consolidated net income for Placid Lake and its subsidiary? If the intra-entity sales were upstream, how would consolidated net income be allocated to the controlling and noncontrolling interest? If the intra-entity sales were downstream, how would consolidated net income be allocated to the controlling and noncontrolling interest? What is the consolidated balance in the ending Inventory account? Assume that no intra-entity inventory sales occurred between Placid Lake and Scenic. Instead, in 2017, Scenic sold land costing $36,000 to Placid Lake for $62,000. On the 2018 consolidated balance sheet, what value should be reported for land? f-1. Assume that no intra-entity inventory or land sales occurred between Placid Lake and Scenic. Instead, on January 1, 2017, Scenic sold equipment (that originally cost $160,000 but had a $66,000 book value on that date) to Placid Lake for $92,000. At the time of sale, the equipment had a remaining useful life of five years. What worksheet entries are made for a December 31, 2018, consolidation of these two companies to eliminate the impact of the intra-entity transfer? f-2. For 2018, what is the non-controlling interest’s share of Scenic’s net income?

Answer 1

Dear Student,

As per the HOMEWORKLIB POLICY, only the first four parts should be answered. Kindly take note of it.

Part A

Placid Lake's 2018 net income before effect from Scenic	360000
Scenic's reported net income 2018	170000
Amortization expense (given)	(4000)
Realization of 2017 intra-entity gross profit (see below)	15300
Deferral of 2018 intra-entity gross profit (see below)	(34000)
Consolidated net income	$507300

2017 Unrealized gross profit to be recognized in 2018:

Intra-entity gross profit on transfers ($105000 - $54000)	51000
Inventory retained at end of 2017	30%
Unrealized gross profit12/31/17	15300

2018 Unrealized gross profit deferred:

Intra-entity gross profit on transfers ($150,000 - $65,000)	85000
Inventory retained at end of 2018	40%
Unrealized gross profit12/31/18	34000

Part B

Noncontrolling interest's share of consolidated net income (upstream sales):

Scenic's reported net income 2018	170000
Amortization of excess fair value to intangibles	(4000)
2017 gross profit realized in 2018 (upstream sales)	15300
2018 gross profit deferred (upstream sales)	(34000)
Scenic's realized net income	147300
Noncontrolling interest ownership	10%
Noncontrolling interest share of consolidated net income	14730
Placid Lakes net income from own operations	360000
Placid Lakes share of Scenics adjusted NI (90%× $147300)	132570
Placid Lakes share of consolidated net income	$492570

Part C

Noncontrolling interest's share of consolidated net income (downstream sales): Downstream transfers do not affect the noncontrolling interest.

Scenic's reported net income 2018 after amortization (170000-4000)	166000
Noncontrolling interest ownership	10%
Noncontrolling interest share of consolidated net income	16600
Placid Lakes net income from own operations	360000
Placid Lakes share of Scenics adjusted NI (90% × $166,000)	149400
Realization of 2017 intra-entity gross profit (see part a.)	15300
Deferral of 2018 intra-entity gross profit (see part a.)	(34000)
Placid Lakes share of consolidated net income	$490700

Part D

Inventory-Placid Lake book value	200000
Inventory-Scenic book value	96000
Unrealized gross profit, 12/31/18 (see part a)	(34000)
Consolidated inventory	$26200

Part A

Placid Lake's 2018 net income before effect from Scenic	360000
Scenic's reported net income 2018	170000
Amortization expense (given)	(4000)
Realization of 2017 intra-entity gross profit (see below)	15300
Deferral of 2018 intra-entity gross profit (see below)	(34000)
Consolidated net income	$507300

2017 Unrealized gross profit to be recognized in 2018:

Intra-entity gross profit on transfers ($105000 - $54000)	51000
Inventory retained at end of 2017	30%
Unrealized gross profit12/31/17	15300

2018 Unrealized gross profit deferred:

Intra-entity gross profit on transfers ($150,000 - $65,000)	85000
Inventory retained at end of 2018	40%
Unrealized gross profit12/31/18	34000

Part B

Noncontrolling interest's share of consolidated net income (upstream sales):

Scenic's reported net income 2018	170000
Amortization of excess fair value to intangibles	(4000)
2017 gross profit realized in 2018 (upstream sales)	15300
2018 gross profit deferred (upstream sales)	(34000)
Scenic's realized net income	147300
Noncontrolling interest ownership	10%
Noncontrolling interest share of consolidated net income	14730
Placid Lakes net income from own operations	360000
Placid Lakes share of Scenics adjusted NI (90%× $147300)	132570
Placid Lakes share of consolidated net income	$492570

Part C

Noncontrolling interest's share of consolidated net income (downstream sales): Downstream transfers do not affect the noncontrolling interest.

Scenic's reported net income 2018 after amortization (170000-4000)	166000
Noncontrolling interest ownership	10%
Noncontrolling interest share of consolidated net income	16600
Placid Lakes net income from own operations	360000
Placid Lakes share of Scenics adjusted NI (90% × $166,000)	149400
Realization of 2017 intra-entity gross profit (see part a.)	15300
Deferral of 2018 intra-entity gross profit (see part a.)	(34000)
Placid Lakes share of consolidated net income	$490700

Part D

Inventory-Placid Lake book value	200000
Inventory-Scenic book value	96000
Unrealized gross profit, 12/31/18 (see part a)	(34000)
Consolidated inventory	$26200