Question

In: Accounting

On January 1, 2017, Pepper purchased 75% of the outstanding shares of Salt for $1,275,000. At...

On January 1, 2017, Pepper purchased 75% of the outstanding shares of Salt for $1,275,000. At that time, Salt’s assets and liabilities had the following book and fair values.

SALT LTD.

January 1, 2017

Book value

Fair value

Cash

$140,000

$140,000

A/R

350,000

350,000

Inventory

345,000

345,000

Capital asset

1,000,000

1,070,000

1,835,000

1,905,000

A/P

255,000

255,000

Common shares

300,000

R/E

1,280,000

1,835,000

Capital assets have a 10-year remaining life.

Balance Sheet

Dec 31, 2017

Pepper

Salt

Cash

$90,000

$160,000

A/R

350,000

410,000

Inventory

420,000

564,000

Capital assets

2,075,000

950,000

Investment in salt

1,275,000

-

$4,210,000

$2,084,000

A/P

$55,000

$377,000

Deferred income tax

75,000

60,000

Long-term debt

900,000

-

Common shares

600,000

300,000

R/E

2,580,000

1,347,000

$4,210,000

$2,084,000

Statements of Income and Retained Earnings

Year ended Dec 31, 2017

Pepper

Salt

Sales

$3,750,000

$980,000

COGS

2,500,000

392,000

1,250,000

588,000

Other expenses

755,000

328,000

Interest on long-term debt

90,000

-

Depreciation

70,000

50,000

Other income

(60,000)

-

855,000

378,000

Net income before tax

395,000

210,000

Income tax

124,500

63,000

Net income after tax

270,500

147,000

Retained earnings, Jan 1, 2017

2,459,500

1,280,000

Dividends declared

(150,000)

(80,000)

Retained earnings, Dec 31, 2017

2,580,000

1,347,000

During 2017, Pepper sold goods to Salt for $130,000. These goods cost Pepper $85,000. Salt sold 60% of these goods during 2017. Also, during 2017, Salt sold goods to Pepper for $90,000, earning a gross profit of 40%. Pepper had 20% of these goods in its 2017 ending inventory. The tax rate for both companies is 30%. On December 31, 2017, Pepper determined that there was a $3,000 goodwill impairment.

Required:

Note: The calculations in part 1 are required to earn marks in part 2. Assignments submitted without supporting calculations will receive zero for this question.

Pepper accounts for Salt using the entity theory and cost methods.

  1. Calculate the following for consolidated financial statements. (2 marks)
    1. a) Goodwill using fair values
    2. b) Acquisition differential, and prepare the ADA table
    3. c) Unrealized inventory profits before and after tax
    4. d) Consolidated net income and the NCI share
    5. e) Consolidated retained earnings and NCI Balance Sheet

Prepare a consolidated income statement that includes a section below net income attributing income to shareholders of Pepper and NCI shareholders. Prepare a consolidated balance sheet for 2017. Prepare these statements in good form. (18 marks)

Solutions

Expert Solution

  1. Have answered forst 3 sub parts. Please comment in case of any doubt.

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