Question

Problem 5-18 (LO 5-1, 5-3, 5-4, 5-5, 5-6, 5-7)

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 $650,000. Any excess fair value was assigned to intangible assets and amortized at a rate of $8,000 per year.

Placid Lake's 2018 net income before consideration of its relationship with Scenic (and before adjustments for intra-entity sales) was $550,000. Scenic reported net income of $360,000. Placid Lake declared $180,000 in dividends during this period; Scenic paid $65,000. At the end of 2018, selected figures from the two companies' balance sheets were as follows:

	Placid Lake			Scenic
Inventory	$	390,000		$	115,000
Land		850,000			450,000
Equipment (net)		650,000			550,000

During 2017, intra-entity sales of $200,000 (original cost of $92,000) were made. Only 10 percent of this inventory was still held within the consolidated entity at the end of 2017. In 2018, $340,000 in intra-entity sales were made with an original cost of $84,000. 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.

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 $55,000 to Placid Lake for $100,000. 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 $180,000 but had a $85,000 book value on that date) to Placid Lake for $120,000. 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

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Consolidated net income for Placid Lake and its subsidairy
2017 Unrealized gross profit to be recognised in 2018
Intra entity gross profit on transfers				$200000-$92000	$108,000
Inventory retained at the end of 2017					10%
unrealised gross profit					$10,800
2017 Unrealised gross profit deferred:
Intra entity gross profit on transfers				$340000-$84000	$256,000
inventory retained at end of 2017					20%
Unrealised gross profit					$51,200
Placid Lake 2018 net income before effecr from Scenic					$550,000
Scenic's reported net income 2018					$360,000
Amortization expenses					($8,000)
Realization of 2017 intra entity gross profit					$10,800
Deferral of 2018 intra entity gross profit					($51,200)
Consolidation Net Income					$861,600
if intra entity sales were upstream how would consolidated net income to be allocated to controlling and non controlling interest
Scenic's reported net income 2018				$360,000
Amortization of excess fair value to intangibles				($8,000)
2017 gross profit realized in 2018 upstream sales				$10,800
2018 gross profit deferred -upstream sales				($51,200)
Scenic realized net income				$311,600
Non Controlling Interest Ownership				30%
Non Controlling Interes share of consolidated net income				$93,480
Placid lake net income from own operations				$550,000
Placid lake share of scenic adjusted NI-70% *$311600				$218,120
Placid Lake share of consolidated net income				$768,120
if intra entity sales were downstream how would consolidated net income to be allocated to controlling and non controlling interest
Scenic reported net income 2018 after amortization				$352,000
Non Controlling Interest				30%
Non Controlling Interest share of considated net income				$105,600
Placid Lake net income from own operations				$550,000
Placid lakes share of scenic adjusted NI-70%*$352000				$246,400
Realisation of 2018 intra entity gross profit				$10,800
Deferral of 2018 intra entity gross profit				($51,200)
Placid lake share of consolidated net income				$756,000
Consoidated Balance in the ending Inventoty
Inventory-Placid Lake Book Value				$390,000
Inventory-Scenic Book Value				$115,000
Unrealised Gross Profit 12/31/18				($51,200)
Consolidated Inventory				$453,800
Assume that no intra entity inventory sales occurred between Placid lake and Scenic .Instead in
2017 Scenic sold land costing $55000 to Placid Lake for $100000.On 2018 Consolidated BS value of land
Land -Placid lake Book Value				$850,000
Land -Scenic Book Value				$450,000
Elimination of unrealized intra entity gain on land				($45,000)
Consolidated Land Balance				$1,255,000