Question

Placid Lake Corporation acquired 90 percent of the outstanding voting stock of Scenic, Inc., on January 1, 2020, 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 2021 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 2021, 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 2020, 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 2020. In 2021, $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 2021.

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 2020, Scenic sold land costing $36,000 to Placid Lake for $62,000. On the 2021 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, 2020, 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, 2021, consolidation of these two companies to eliminate the impact of the intra-entity transfer?

2. f-2. Assume that no intra-entity inventory or land sales occurred between Placid Lake and Scenic. Instead, on January 1, 2020, 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. For 2021, what is the noncontrolling interest’s share of Scenic’s net income?

Answer 1

I have solved first 4 options.

a Calculation of Consolidated Net Income for Placid Lake and its subsidiary: Placid's Lake's 2021 Net Income before effect from Scenic Scenic Net Income reported Amortization Expense - given Realization of 2020 Intra - company GP Deferral of 2021 Intra-entity GP Consolidated Net Income Amount $ 360,000 $ 170,000 $ (4,000) $ 15,300 $ (34,000) $ 507,300 $ 2020 Intra-entity GP to be recognised in 2021 Intra -entity GP transfers (105000 - 54000) Inventory retained at the end of 2020 Intra -entity Gp in ending Inventory 51,000 30% 15,300 $ $ 2020 Intra-entity GP to be deferred Intra -entity GP transfers 150000 - 65000) Inventory retained at the end of 2021 Intra-entity GP in ending Inventory 85,000 40% 34,000 $

21 b Calculation of allocation of Net Income 22 23 24 25 26 27 Scenic Net Income reported in 2021 Amortization of Excess FV of Intangibles 2020 Intra-entity GP recognized in 2021 (Upstream sales) 2021 Intra-entity GP deferred (Upstream sales) Scenic Adjusted Net Income Non Controlling Interest Ownership Non Controlling Interest share of consolidated net income Placid Lake's Net Income from own operations Placid Lake's Share of scenic's Adjusted NI (90% of $ 147300) Placid Lake's Share of Consolidated Net Income $ 170,000 $ (4,000) $ 15,300 $ (34,000) $ 147,300 10% $ 14,730 $ 360,000 $ 132,570 $ 492,570 28 29 30 31 32 33 34 35 c $ 36 37 38 Scenic's Net Income reported in 2018 after amortization NCI ownership NCI share of consolidated Net Income Placid Lake's Net Income from own operations Placid Lake's Share of scenic's Adjusted NI (90% of $ 166000) Realization of 2020 intra-entity GP Deferral of 2021 intra-entity GP Placid Lake's Share of Consolidated Net Income 166,000 10% 16,600 360,000 149,400 15,300 (34,000) 490,700 $ $ $ $ $ $ 39 40 41 42 13

4 5 d Placid Book value of Inventory Sceneic Book Value of Inventory Intra's entity GP 2021 end Consolidated Inventory $ $ $ $ 200,000 96,000 (34,000) 262,000 -7 -8 9 o