Question

Placid Lake Corporation acquired 70 percent of the outstanding voting stock of Scenic, Inc., on January 1, 2017, when Scenic had a net book value of $410,000. 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 $310,000. Scenic reported net income of $120,000. Placid Lake declared $110,000 in dividends during this period; Scenic paid $41,000. At the end of 2018, selected figures from the two companies' balance sheets were as follows:

	Placid Lake			Scenic
Inventory	$	150,000		$	91,000
Land		610,000			210,000
Equipment (net)		410,000			310,000

During 2017, intra-entity sales of $80,000 (original cost of $44,000) were made. Only 10 percent of this inventory was still held within the consolidated entity at the end of 2017. In 2018, $100,000 in intra-entity sales were made with an original cost of $60,000. Of this merchandise, 20 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.

1. What is consolidated net income for Placid Lake and its subsidiary?

2. If the intra-entity sales were upstream, how would consolidated net income be allocated to the controlling and noncontrolling interest?

3. If the intra-entity sales were downstream, how would consolidated net income be allocated to the controlling and noncontrolling interest?

4. What is the consolidated balance in the ending Inventory account?

5. Assume that no intra-entity inventory sales occurred between Placid Lake and Scenic. Instead, in 2017, Scenic sold land costing $31,000 to Placid Lake for $52,000. On the 2018 consolidated balance sheet, what value should be reported for land?

1. 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 $110,000 but had a $61,000 book value on that date) to Placid Lake for $82,000. 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?

2. f-2. For 2018, what is the noncontrolling interest’s share of Scenic’s net income?

Answer 1

Answer :

(a).

Placid Lake's 2018 net income before effect from Scenic	310000
Scenic's reported net income 2018	120000
Amortization expense	(4000)
Realization of 2017 intra - entity gross profit	3600
Deferral of 2018 Intra entity gross profit	(8000)
Consolidated net income	$421600

2017 Unrealized gross profit to be recognized in 2018
Intra - entity gross profit on transfers (80000 - 44000)	36000
Inventory retained at end of 2017	10%
Unrealized gross profit 12.31.2017	3600

2017 Unrealized gross profit to be recognized in 2018
Intra entity gross profit on transfer ($100,000 - $60,000)	40000
Inventory retained at end of 2017	20%
Unrealized gross profit 12.31.2017	8000

(b).

Scenic's reported net in come 2018	120000
Amortization of excess fair value to intangibles	(4000)
2017 gross profit realized in 2018 (upstream sales)	3600
2018 Gross profit deferred (upstream sales)	(8000)
Scenic's realized net income	111600
Non controlling interest ownership	30%
Non controlling interest share of consolidated net income	$33480

Placid Lakes net income from own operations	310000
Placid Lakes share of Scenic's adjusted NI (70% * $111600)	78120
Placid Lakes share of consolidated net income	$388120

(c) Non controlling interest's share of consolidated net income (down stream sales) Down stream transfers do not affect the non controlling interest

Scenic's reported net income 2018 after amortization (120000 - 4000)	116000
No controlling interest ownership	30%
Non controlling interest share of consolidated net income	$33480

Placid Lacks net income from own operations	310000
Placid Lakes share of Scenic's adjusted NI (70$*116000)	81200
Realization of 2017 intra entity gross proft	3600
Deferred of 2018 intra entity gross profit	(8000)
Placid Lakes share of consolidated net income	$958200

(d).

Inventory - Placid Lake book value	150000
Inventory - Scenic book value	91000
Unrealized gross profit 12.31.2018	(8000)
Consolidated inventory	$233000

Note : As per HOMEWORKLIB POLICY i'm allowed to answer only four sub-parts of the question. So, please re-post remaining sub-parts separately to answer.

Thank You !!!