Question

Pepper Company acquired 80 percent of Salt Company's stock at underlying book value on January 1, 2018. Pepper Company acquired 80 percent of Salt Company's stock at underlying book value on January 1, 2018. At that date, Salt reported common stock outstanding of $1,050,000 and retained earnings of $840,000; the fair value of the noncontrolling interest was equal to 20 percent of the book value of Salt Company. Salt Co. sold equipment to Pepper Co. for a $720,000 on December 31, 2018. Salt Co. had originally purchased the equipment for $800,000 on January 1, 2015, with a useful life of 10 years and no salvage value. At the time of the purchase, Pepper Co. estimated that the equipment still had the same remaining useful life. Both companies use straight-line depreciation.
Pepper sold land costing $132,000 to Salt Company on June 28, 2019, for $178,000.

Textbook: Custom edition of Advanced Financial Accounting,12th Edition, Christensen, Cottrell and Budd; Mc-Graw Hill.

Required:

1. Prepare Pepper’s journal entries related to intercompany sale for 2019 to account for the investment in Salt.
2. Prepare the consolidation entries that related to intercompany sale of land for 2019.
3. Prepare the consolidation entries that related to intercompany sale of equipment for 2019.
4. Assume S reported net income of $35,000 and dividends of $7,000 for each year of 2018 and 2019. Calculate Pepper’s investment account on December 31, 2019.

Answer 1

1. Journal Entry for Investment in Salt Company in the Books of Pepper Company

Date	Account Name	Debit ($)	Credit ($)
01.01.2018	Investment in Shares of Salt Company	15,12,000.00
	($1,050,000+$840,000)*0.80
	Cash		15,12,000.00
	(Being Shares of Salt Company Acquired)

2. Journal Entry for Sale of Land

Pepper Company
Date	Account Name	Debit ($)	Credit ($)
28.06.2019	Cash	1,78,000.00
	Land		1,32,000.00
	Gain on Sale		46,000.00
	(Being Land sold to Salt Company)
Salt Company
Date	Account Name	Debit ($)	Credit ($)
28.06.2019	Land	1,78,000.00
	Cash		1,78,000.00
	(Being Land Purchased from Pepper Ltd.)
Workpaper Entries to Elimination of Unrealised Profit
Date	Account Name	Debit ($)	Credit ($)
31.12.2019	Gain on Sale	46,000.00
	Land		46,000.00
	(Being Elimination of Unrealised Profit on sale of land)

3. Journal Entry for Sale of Equipment

Pepper Company
Date	Account Name	Debit ($)	Credit ($)
31.12.2018	Cash	7,20,000.00
	Accumulated Depreciation-Equipment	3,20,000.00
	(800000/10)*4
	Equipments		8,00,000.00
	Gain on Sale of Equipments		2,40,000.00
	(Being Land sold to Salt Company)
Salt Company
Date	Account Name	Debit ($)	Credit ($)
31.12.2018	Equipments	7,20,000.00
	Cash		7,20,000.00
	(Being Equipments Purchased from Pepper Ltd.)
31.12.2019	Depreciation Expenses	1,20,000.00
	(720000/6)
	Accumulated Depreciation-Equipment		1,20,000.00
	(Being Depreciation Charged)
Workpaper Entries to Elimination of Unrealised Profit
Date	Account Name	Debit ($)	Credit ($)
31.12.2019	Equipments	80,000.00
	Gain on Sale of Equipments	2,40,000.00
	Depreciation Expenses		40,000.00
	Accumulated Depreciation-Equipment		2,80,000.00
	(Being Elimination of Unrealised gain and restore the Equipment to its original cost and adjust depreciation)

4. Value of Investment as on Dec 31, 2019

Particulars	Amount ($)
Purchase Cost	15,12,000.00
($1,050,000+$840,000)*0.80
Less: Pre-acuisition Dividend of 2018 (7000*.80)	-5,600.00
Value as on 31 Dec 2019	15,06,400.00