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 $470,000. Any excess fair value was assigned to intangible assets and amortized at a rate of $5,000 per year. Placid Lake's 2021 net income before consideration of its relationship with Scenic (and before adjustments for intra-entity sales) was $370,000. Scenic reported net income of $180,000. Placid Lake declared $170,000 in dividends during this period; Scenic paid $47,000. At the end of 2021, selected figures from the two companies' balance sheets were as follows: Placid Lake Scenic Inventory $ 210,000 $ 97,000 Land 670,000 270,000 Equipment (net) 470,000 370,000 During 2020, intra-entity sales of $110,000 (original cost of $56,000) were made. Only 10 percent of this inventory was still held within the consolidated entity at the end of 2020. In 2021, $160,000 in intra-entity sales were made with an original cost of $66,000. 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. If the intra-entity sales were upstream, how would consolidated net income be allocated to the controlling and noncontrolling interest? If the intra-entity sales were downstream, how would consolidated net income be allocated to the controlling and noncontrolling interest? 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 $170,000 but had a $67,000 book value on that date) to Placid Lake for $94,000. 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? 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 $170,000 but had a $67,000 book value on that date) to Placid Lake for $94,000. 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?
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 $470,000. Any excess fair value was assigned to intangible assets and amortized at a rate of $5,000 per year.
Placid Lake's 2021 net income before consideration of its relationship with Scenic (and before adjustments for intra-entity sales) was $370,000. Scenic reported net income of $180,000. Placid Lake declared $170,000 in dividends during this period; Scenic paid $47,000. At the end of 2021, selected figures from the two companies' balance sheets were as follows:
| Placid Lake | Scenic | |||||
| Inventory | $ | 210,000 | $ | 97,000 | ||
| Land | 670,000 | 270,000 | ||||
| Equipment (net) | 470,000 | 370,000 | ||||
During 2020, intra-entity sales of $110,000 (original cost of $56,000) were made. Only 10 percent of this inventory was still held within the consolidated entity at the end of 2020. In 2021, $160,000 in intra-entity sales were made with an original cost of $66,000. 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.
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If the intra-entity sales were upstream, how would consolidated net income be allocated to the controlling and noncontrolling interest?
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If the intra-entity sales were downstream, how would consolidated net income be allocated to the controlling and noncontrolling interest?
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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 $170,000 but had a $67,000 book value on that date) to Placid Lake for $94,000. 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?
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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 $170,000 but had a $67,000 book value on that date) to Placid Lake for $94,000. At the time of sale, the equipment had a remaining useful life of five years. For 2021, what is the noncontrolling interest’s share of Scenic’s net income?
1. If the intra-entity sales were upstream, how would the consolidated net income be allocated to the controlling and noncontrolling interest.
| Particulars | Amount($) |
| Scenic reported net income 2021 | $180,000 |
| Amortization of excess fair value to Intangibles | ($5,000) |
| 2020 gross profit realized in 2021 (upstream sales) | $5,400 |
| 2021 gross profit deferred (upstream sales) | $18,800 |
| Scenic realized Net Income | $161,600 |
| Noncontrolling interest Ownership | 30% |
| Noncontrolling interest share of consolidated net income | $48,480 |
| Placid Lake's net income from own operations | $370,000 |
| Placid Lake's share of Scenic's adjusted Net Income | $113,120 |
| Placid Lake's share of consolidated Net Income | $483,120 |
2. If the intra-entity sales were downstream, how would the consolidated net income be allocated to the controlling and noncontrolling interest.
| Particulars | Amount |
| Scenic reported net Income after amortization | $175,000 |
| Noncontrolling interest Ownership | 30% |
| Noncontrolling interest share of consolidated net income | $52,500 |
| Placid Lake's net income from own operations | $370,000 |
| Placid lake's share of Scenic's adjusted Net Income | $122,500 |
| Realization of 2017 intra-entity gross profit | $5,400 |
| Deferral of 2018 intra-entity gross profit | ($18,800) |
| Placid Lake's share of consolidated Net Income | $479,100 |
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