Placid Lake Corporation acquired 80 percent of the outstanding voting stock of Scenic, Inc.,on January 1, 2012, when Scenic had a net book value of $400,000. Any excess fair value wasassigned to intangible assets and amortized at a rate of $5,000 per year.
Placid Lake's 2013 net income before consideration of its relationship with Scenic (and beforeadjustments for intra-entity sales) was $300,000. Scenic reported net income of $110,000.
Placid Lake distributed $100,000 in dividends during this period; Scenic paid $40,000. At theend of 2013, 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 2012, 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 2012. In
2013, $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 theyear 2013.
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 tothe controlling and non-controlling interest?
c. If the intra-entity sales were downstream, how would consolidated net income be allocatedto the controlling and non-controlling 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 2012, Scenic sold land costing $30,000 to Placid Lake for $50,000. On the 2013consolidated 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, 2012, Scenic sold equipment (that originally cost $100,000 buthad a $60,000 book value on that date) to Placid Lake for $80,000. At the time of sale, theequipment had a remaining useful life of five years. What worksheet entries are made fora December 31, 2013, consolidation of these two companies to eliminate the impact of theintra-entity transfer? For 2013, what is the non-controlling interest's share of Scenic's netincome?