Question

Placid Lake Corporation acquired 70 percent of the outstanding voting stock of Scenic, Inc., on January 1, 2020, when Scenic had a net book value of $410,000. 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 $310,000. Scenic reported net income of $120,000. Placid Lake declared $110,000 in dividends during this period; Scenic paid $41,000. At the end of 2021, selected figures from the two companies' balance sheets were as follows:

	Placid Lake			Scenic
Inventory	$	150,000		$	91,000
Land		610,000			210,000
Equipment (net)		410,000			310,000

During 2020, intra-entity sales of $80,000 (original cost of $44,000) were made. Only 10 percent of this inventory was still held within the consolidated entity at the end of 2020. In 2021, $100,000 in intra-entity sales were made with an original cost of $60,000. 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 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 $31,000 to Placid Lake for $52,000. 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 $110,000 but had a $61,000 book value on that date) to Placid Lake for $82,000. 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 $110,000 but had a $61,000 book value on that date) to Placid Lake for $82,000. 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

Placid Lake's 2020 net income before effect from Scenic   310,000
Scenic's reported net income 2021   120,000
Amortization expense   (4,000)
Realization of 2020 intra-entity gross profit   3,600
Deferral of 2021 intra-entity gross profit   (8,000)
Consolidated net income $421,600
  
2020 Unrealized gross profit to be recognized in 2021:
Intra-entity gross profit on transfers (80,000-44,000)   36,000
Inventory retained at end of 2020   10%
Unrealized gross profit 12/31/20 3,600

2020 Unrealized gross profit to be recognized in 2021:  
Intra-entity gross profit on transfers ($100,000 – $60,000)   40,000
Inventory retained at end of 2020   20%
Unrealized gross profit 12/31/21   8,000

Non controlling interest share of consolidated net income( upstream sales)
Scenic's reported net income 2021   120,000
Amortization of excess fair value to intangibles   (4,000)
2020 gross profit realized in 2021 (upstream sales)   3,600
2021 gross profit deferred (upstream sales)   (8,000)
Scenic's realized net income   111,600
Non controlling interest ownership   30%
Non controlling interest share of consolidated net income   $33,480
Placid Lakes net income from own operations   310,000
Placid Lakes share of Scenics adjusted NI (70%× $111,600)   78,120
Placid Lakes share of consolidated net income   $388,120

Non controlling interest share of consolidated net income (downstream sales)

Downstream transfers do not affect the noncontrolling interest.
Scenic's reported net income 2021 after amortization (120,000-4,000)   116,000
Noncontrolling interest ownership   30%
Noncontrolling interest share of consolidated net income   $33,480
Placid Lakes net income from own operations   310000
Placid Lakes share of Scenics adjusted NI (70% × $116,000)   81,200
Realization of 2020 intra-entity gross profit   3,600
Deferral of 2021 intra-entity gross profit   (8,000)
Placid Lakes share of consolidated net income   $958,200

Inventory-Placid Lake book value   150,000
Inventory-Scenic book value   91,000
Unrealized gross profit, 12/31/21   (8000)
Consolidated inventory $233,000

Land - Placid book value 610,000

Land - Scenic book value 210,000

Elimination of unrealized intra-entity gain on land (21,000)

Consolidated Inventory 799,000

General journal	Debit	Credit
Retained earnings	16,800
Equipment	28,000
Accumulated Depreciation		44,800
Accumulated depreciation	4,200
Depreciation expense		4,200

Calculation of non controlling interest share

Scenic's net income 120,000

Reduction in depreciation 4,200

Amortization expense (4,000)

Scenics realized income 120,200

Non controlling interest share 36,060