Question

Placid Lake Corporation acquired 80 percent of the outstanding voting stock of Scenic, Inc., on January 1, 2017, when Scenic had a net book value of $630,000. Any excess fair value was assigned to intangible assets and amortized at a rate of $6,000 per year. Placid Lake's 2018 net income before consideration of its relationship with Scenic (and before adjustments for intra-entity sales) was $530,000. Scenic reported net income of $340,000. Placid Lake declared $160,000 in dividends during this period; Scenic paid $63,000. At the end of 2018, selected figures from the two companies' balance sheets were as follows: Placid Lake Scenic Inventory $ 370,000 $ 113,000 Land 830,000 430,000 Equipment (net) 630,000 530,000 During 2017, intra-entity sales of $190,000 (original cost of $88,000) were made. Only 20 percent of this inventory was still held within the consolidated entity at the end of 2017. In 2018, $320,000 in intra-entity sales were

made with an original cost of $82,000. Of this merchandise, 30 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 $53,000 to Placid Lake for $96,000. 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 $83,000 book value on that date) to Placid Lake for $116,000. 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 noncontrolling interest’s share of Scenic’s net income?

Answer 1

Part A

Placid Lake's 2018 net income before effect from Scenic	530000
Scenic's reported net income 2018	340000
Amortization expense (given)	(6000)
Realization of 2017 intra-entity gross profit (see below)	20400
Deferral of 2018 intra-entity gross profit (see below)	(71400)
Consolidated net income	813000

2017 Unrealized gross profit to be recognized in 2018:

Intra-entity gross profit on transfers ($190000 - $88000)	102000
Inventory retained at end of 2017	20%
Unrealized gross profit12/31/17	20400

2018 Unrealized gross profit deferred:

Intra-entity gross profit on transfers ($320,000 - $82,000)	238000
Inventory retained at end of 2018	30%
Unrealized gross profit12/31/18	71400

Part B

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

Scenic's reported net income 2018	340000
Amortization of excess fair value to intangibles	(6000)
2017 gross profit realized in 2018 (upstream sales)	20400
2018 gross profit deferred (upstream sales)	(71400)
Scenic's realized net income	283000
Noncontrolling interest ownership	20%
Noncontrolling interest share of consolidated net income	56600
Placid Lakes net income from own operations	530000
Placid Lakes share of Scenics adjusted NI (80%× $283000)	226400
Placid Lakes share of consolidated net income	756400

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 (340000-6000)	334000
Noncontrolling interest ownership	20%
Noncontrolling interest share of consolidated net income	66800
Placid Lakes net income from own operations	530000
Placid Lakes share of Scenics adjusted NI (80% × $334000)	267200
Realization of 2017 intra-entity gross profit (see part a.)	20400
Deferral of 2018 intra-entity gross profit (see part a.)	(71400)
Placid Lakes share of consolidated net income	746200

Part D

Inventory-Placid Lake book value	370000
Inventory-Scenic book value	113000
Unrealized gross profit, 12/31/18 (see part a)	(71400)
Consolidated inventory	411600

Note: I have answered first 4 parts of the question as HOMEWORKLIB policy, kindly post separate question for answer of remaining parts.

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