Question

Placid Lake Corporation acquired 80 percent of the outstanding voting stock of Scenic, Inc., on January 1, 2014, when Scenic had a net book value of $400,000. Any excess fair value was assigned to intangible assets and amortized at a rate of $5,000 per year.

Placid Lake’s 2015 net income before consideration of its relationship with Scenic (and before adjustments for intra-entity sales) was $300,000. Scenic reported net income of $110,000. Placid Lake declared $100,000 in dividends during this period; Scenic paid $40,000. At the end of 2015, selected figures from the two companies’ balance sheets were as follows:

	Placid Lake	Scenic
Inventory . . . . . . . . . . . . . . . . . . . . . . .	$140,000	$ 90,000
Land . . . . . . . . . . . . . . . . . . . . . . . . . . .	600,000	200,000
Equipment (net) . . . . . . . . . . . . . . . . . .	400,000	300,000

During 2014, intra-entity sales of $90,000 (original cost of $54,000) were made. Only 20 percent of this inventory was still held within the consolidated entity at the end of 2014. In 2015, $120,000 in intra-entity sales were made with an original cost of $66,000. 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 2015.

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 2014, Scenic sold land costing $30,000 to Placid Lake for $50,000. On the 2015 consolidated balance sheet, what value should be reported for land?

f.Assume that no intra-entity inventory or land sales occurred between Placid Lake and Scenic. Instead, on January 1, 2014, Scenic sold equipment (that originally cost $100,000 but had a $60,000 book value on that date) to Placid Lake for $80,000. At the time of sale, the equipment had a remaining useful life of five years. What worksheet entries are made for a December 31, 2015, consolidation of these two companies to eliminate the impact of the intra-entity transfer? For 2015, what is the noncontrolling interest’s share of Scenic’s net income?

Answer 1

(a) What is consolidated net income for Placid Lake and its subsidiary?

P’s NI $300,000

S’s NI 110,000

Amortization expense (given) (5,000)

Realized of 2014 gross profit 7,200

Unrealized of 2015 gross profit (16,200)

  Consolidated net income $396,000

2014 Unrealized gross profit to be recognized in 2015:

gross profit on transfers ($90,000 – $54,000) $36,000

Inventory retained at end of 2014 20%

Unrealized gross profit—31/12/2014 $ 7,200

2015 Unrealized gross profit deferred:

gross profit on transfers ($120,000 – $66,000) $54,000

Inventory retained at end of 30%

Unrealized gross profit—31/12/2015 $16,200

b. If the intra-entity sales were upstream, how would consolidated net income be allocated to thecontrolling and noncontrolling interest?

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

S's reported net income 2015 $110,000

Amortization (5,000)

2014 gross profit realized in 2015 (upstream sales) 7,200

2015 gross profit deferred (upstream sales) (16,200)

S's realized net income $96,000

Noncontrolling interest ownership 20%

NCI share of consolidated net income $19,200

P’s net income from own operations $300,000

P’s share of S’s adjusted NI (80%× $96,000) 76,800

P’s share of consolidated net income $376,800

c. If the intra-entity sales were downstream, how would consolidated net income be allocated to the controlling and noncontrolling interest?

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

Downstream transfers do not affect the noncontrolling interest.

S's net income 2015 $105,000

Amortization ( 5,000 )

Noncontrolling interest ownership 20%

Noncontrolling interest share of consolidated net income $21,000

P’s net income from own operations $300,000

P’s share of S’s adjusted NI (80% × $105,000) 84,000

Realization of 2014 gross profit (see part a) 7,200

Deferral of 2015 gross profit (see part a.) (16,200)

P’s share of consolidated net income $375,000

d. What is the consolidated balance in the ending Inventory account?

Placid Lake $140,000

Scenic $90,000

Realized of 2014 gross profit 7,200

Unrealized of 2015 gross profit (16,200)

Consolidated Closing Inventory $213,800

e. Land—P’s book value                                                        $600,000

   Land—S's book value                                                          200,000

  unrealized gain on land                                                        (20,000)

   Consolidated land balance                                                 $780,000

f. Year 1

    TA

    Gain on sale of Equip                               20,000 (80-60)

    Equip                                                        20,000

                           Acc. Dep                            40,000

ED

        Acc. Dep                                                4,000

                           Dep. Exp                             4,000

    Year 2

      TA

      RE                                                                    16,000

(20,000 -4,000)*592754102135632]/”060534

      Equip                                                                20,000

                                Acc. Dep                                 36,000

ED

      Same

Year 3

     TA

      RE                                                         12,000

      Equip                                                     20,000

                     Acc. Dep                                 32,000

ED

Same

NcI in S’s NI :

S’s NI 2015                                         110,000

Amort                                                   (5,000)

Realized gain from sale                         4,000

$109,000

NCI 20%

$21,800