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. 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

Please find below table useful to compute desired results: -

Land - Placid book value Land - Scenic book value Elimination of unrealized intra-entity gain on land Consolidated Inventory 610000 210000 =31000-52000 =SUM(C1:C3) Credit 6 Entry General Journal 7 TA Retained Earnings Equipment Accumulated Depreciation Debit =82000-61000-(82000-61000)/5 =110000-82000 9 =110000-61000-(82000-61000)/5 ED =(82000-61000)/5 Accumlated Depreciation Depreciation Expense Calculation of Non-controlling interest share Scenic's Net Income 120000 Reduction in Depreciation =D12 Amortization Expense -4000 Scenic's Realized Income =SUM(C16:C18) Noncontrolling Interest's Share =C19*30%

End results would be as follows: -

А D в Land - Placid book value Land - Scenic book value Elimination of unrealized intra-entity gain on land Consolidated Inventory 610,000 210,000 (21,000) 799,000 Credit 6 7 Entry General Journal TA Retained Earnings Equipment Accumulated Depreciation Debit 16,800 28,000 44,800 11 ED 4,200 Accumlated Depreciation Depreciation Expense 4,200 Calculation of Non-controlling interest share Scenic's Net Income 120.000 Reduction in Depreciation 4,200 Amortization Expense (4,000) Scenic's Realized Income 120.200 Noncontrolling Interest's Share 36,060