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

As per policy only first four questions will be answered

Part A

Placid Lake's 2015 net income before effect from Scenic	300000
Scenic's reported net income 2015	110000
Amortization expense (given)	(5000)
Realization of 2014 intra-entity gross profit (see below)	7200
Deferral of 2015 intra-entity gross profit (see below)	(16200)
Consolidated net income	396000

2014 Unrealized gross profit to be recognized in 2015:

Intra-entity gross profit on transfers ($90,000 $54,000)	36000
Inventory retained at end of 2014	20%
Unrealized gross profit12/31/14	7200

2015 Unrealized gross profit deferred:

Intra-entity gross profit on transfers ($120,000 $66,000)	54000
Inventory retained at end of 2015	30%
Unrealized gross profit12/31/15	16200

Part B

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

Scenic's reported net income 2015	110000
Amortization of excess fair value to intangibles	(5000)
2014 gross profit realized in 2015 (upstream sales)	7200
2015 gross profit deferred (upstream sales)	(16200)
Scenic's realized net income	96000
Noncontrolling interest ownership	20%
Noncontrolling interest share of consolidated net income	19200

Placid Lakes net income from own operations	300000
Placid Lakes share of Scenics adjusted NI (80%× $96,000)	76800
Placid Lakes share of consolidated net income	376800

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 2015 after amortization	105000
Noncontrolling interest ownership	20%
Noncontrolling interest share of consolidated net income	21000

Placid Lakes net income from own operations	300000
Placid Lakes share of Scenics adjusted NI (80% × $105,000)	84000
Realization of 2014 intra-entity gross profit (see part a.)	7200
Deferral of 2015 intra-entity gross profit (see part a.)	(16200)
Placid Lakes share of consolidated net income	375000

Part D

Inventory-Placid Lake book value	140000
Inventory-Scenic book value	90000
Unrealized gross profit, 12/31/15 (see part a)	(16200)
Consolidated inventory	213800