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
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 $430,000. Any
excess fair value was assigned to intangible assets and amortized at a rate of
$6,000 per year.
Placid Lake's 2018 net income before consideration of its relationship with Scenic
(and before adjustments for intra-entity sales) was $330,000. Scenic reported net
income of $140,000. Placid Lake declared $130,000 in dividends during this period;
Scenic paid $43,000. At the end of 2018, selected figures from the two companies'
balance sheets were as follows:
Placid Lake Scenic
Inventory $ 170,000 $ 93,000
Land 630,000 230,000
Equipment (net) 430,000 330,000
During 2017, intra-entity sales of $90,000 (original cost of $48,000) were made.
Only 30 percent of this inventory was still held within the consolidated entity at the
end of 2017. In 2018, $120,000 in intra-entity sales were made with an original cost
of $62,000. 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.
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 2017, Scenic sold land costing $33,000 to Placid Lake for
$56,000. 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 $130,000 but had a $63,000 book value on that date) to Placid
Lake for $86,000. 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 non-controlling interest's share of the Scenic's net income?
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