Question

Placid Lake Corporation acquired 90 percent of the outstanding voting stock of Scenic, Inc., on January 1, 2017, when Scenic had a net book value of $520,000. 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 $420,000. Scenic reported net income of $230,000. Placid Lake declared $110,000 in dividends during this period; Scenic paid $52,000. At the end of 2018, selected figures from the two companies' balance sheets were as follows:

	Placid Lake			Scenic
Inventory	$	260,000		$	102,000
Land		720,000			320,000
Equipment (net)		520,000			420,000

During 2017, intra-entity sales of $135,000 (original cost of $66,000) were made. Only 30 percent of this inventory was still held within the consolidated entity at the end of 2017. In 2018, $210,000 in intra-entity sales were made with an original cost of $71,000. 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 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 $42,000 to Placid Lake for $74,000. On the 2018 consolidated balance sheet, what value should be reported for land?

Answer 1

17 What is consolidated net income for Placid Lake and its subsidiary? 18 2017 Unrealized gross profit to be recognized in 2018 Intra-entity gross profit on transfers (135,000 - 66,000) Inventory retained at end of 2017 Unrealized gross profit 69,000 30% 20,700 2017 Unrealized gross profit deferred: Intra-entity gross profit on transfers (210,000 -71,000) Inventory retained at end of 2017 Unrealized gross profit 139.000 40% 55,600 Placid Lake's 2018 net income before effect from Scenic Scenic's reported net income 2018 Amortization expense (given) Realization of 2017 intra-entity gross profit Deferral of 2018intra-entity gross profit Consolidated net income 420,000 230,000 (5,000) 20,700 (55.600) 610,100

38 If the intra-entity sales were upstream, how would consolidated net income be allocated to the controlling and noncontrolling interest? Scenic's reported net income 2018 230,000 40 Amortization of excess fair value to intangibles (5,000) 2017 gross profit realized in 2018 (upstream sales) 20,700 2018 gross profit deferred (upstream sales) (55,600) Scenic's realized net income 190,100 Noncontrolling interest ownership 10% Noncontrolling interest share of consolidated net income 19,010 Placid Lake's net income from own operations Placid Lake's share of Scenic's adjusted NI (90%* 190100) Placid Lake's share of consolidated net income 420,000 171,090 591,090 If the intra-entity sales were downstream, how would consolidated net income be allocated to the controlling and noncontrolling interest? Scenic's reported net income 2018 after amortization Noncontrolling interest ownership Noncontrolling interest share of consolidated net income 225,000 10% 22,500 Placid Lake's net income from own operations Placid Lake's share of Scenic's adjusted NI (90% * 225,000) Realization of 2017 intra-entity gross profit Deferral of 2018 intra-entity gross profit Placid Lake's share of consolidated net income 420,000 202,500 20,700 (55,600) 587,600

What is the consolidated balance in the ending Inventory account? Inventory—Placid Lake book value Inventory-Scenic book value Unrealized gross profit, 12/31/18 Consolidated inventory 260,000 102,000 (55,600) 306,400 72 Assume that no intra-entity inventory sales occurred between Placid Lake and Scenic. Instead, in 2017, Scenic sold land costing $42,000 to Placid Lake for $74,000. On the 2018 consolidated 74 balance sheet, what value should be reported for land? 73 Land-Placid Lake's book value LandScenic's book value Elimination of unrealized intra-entity gain on land Consolidated land balance 720,000 320,000 (32,000) 1,008,000