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 $420,000. Any excess fair value was assigned to intangible assets and amortized at a rate of $5,000 per year. Placid Lake's 2018 net income before consideration of its relationship with Scenic (and before adjustments for intra-entity sales) was $320,000. Scenic reported net income of $130,000. Placid Lake declared $120,000 in dividends during this period; Scenic paid $42,000. At the end of 2018, selected figures from the two companies' balance sheets were as follows: $ Inventory Land Equipment (net) Placid Lake $ 160,000 620,000 420,000 Scenic 92,000 220,000 320,000 During 2017, intra-entity sales of $85,000 (original cost of $46,000) were made. Only 20 percent of this inventory was still held within the consolidated entity at the end of 2017. In 2018, $110,000 in intra-entity sales were made with an original cost of $61,000. 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. a. What is consolidated net income for Placid Lake and its subsidiary? b. If the intra-entity sales were upstream, how would consolidated net income be allocated to the controlling and noncontrolling interest? c. If the intra-entity sales were downstream, how would consolidated net income be allocated to the controlling and noncontrolling interest? d. What is the consolidated balance in the ending Inventory account? e. Assume that no intra-entity inventory sales occurred between Placid Lake and Scenic. Instead, in 2017, Scenic sold land costing $32,000 to Placid Lake for $54,000. On the 2018 consolidated balance sheet, what value should be reported for land?

Answer 1

Dear Student,

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

Part A

Placid Lake's 2018 net income before effect from Scenic	320000
Scenic's reported net income 2018	130000
Amortization expense (given)	(5000)
Realization of 2017 intra-entity gross profit (see below)	7800
Deferral of 2018 intra-entity gross profit (see below)	(11400)
Consolidated net income	441400

2017 Unrealized gross profit to be recognized in 2018:

Intra-entity gross profit on transfers ($85000 - $46000)	39000
Inventory retained at end of 2017	20%
Unrealized gross profit12/31/17	7800

2018 Unrealized gross profit deferred:

Intra-entity gross profit on transfers ($110,000 - $61,000)	103000
Inventory retained at end of 2018	30%
Unrealized gross profit12/31/18	14700

Part B

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

Scenic's reported net income 2018	130000
Amortization of excess fair value to intangibles	(5000)
2014 gross profit realized in 2015 (upstream sales)	7800
2015 gross profit deferred (upstream sales)	(11400)
Scenic's realized net income	121400
Noncontrolling interest ownership	20%
Noncontrolling interest share of consolidated net income	24280
Placid Lakes net income from own operations	320000
Placid Lakes share of Scenics adjusted NI (80%× $121400)	97120
Placid Lakes share of consolidated net income	417120

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 (130000-5000)	125000
Noncontrolling interest ownership	20%
Noncontrolling interest share of consolidated net income	25000
Placid Lakes net income from own operations	320000
Placid Lakes share of Scenics adjusted NI (80% × $125,000)	100000
Realization of 2017 intra-entity gross profit (see part a.)	7800
Deferral of 2018 intra-entity gross profit (see part a.)	(11400)
Placid Lakes share of consolidated net income	416400

Part D

Inventory-Placid Lake book value	160000
Inventory-Scenic book value	92000
Unrealized gross profit, 12/31/18 (see part a)	(11400)
Consolidated inventory	240600