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Question 10 Pepper Company acquired 80 percent of Salt Company's stock at underlying book value on...

Question 10

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.

a) Prepare Pepper’s journal entries related to intercompany sale of land and equipment for 2019.

b) Prepare the consolidation entries that related to intercompany sale of land  for 2019.

c) Prepare the consolidation entries that related to intercompany sale of equipment for 2019.

Solutions

Expert Solution

1)

Date Journal Entry Debit Credit
1 Jan, 2018 Investment in shares of salt company $1,512,000
To cash (1,050,000 + 840,000) * 80% $1,512,000
(Being shares of salt company acquired)

2) Pepper Company

Date Journal Entry Debit Credit
28 June, 2019 Cash $178,000
To Land $132,000
To gain on sale $46,000
(Being land sold to salt company)

Salt Company

Date Journal Entry Debit Credit
28 June, 2019 Land $178,000
To cash $178,000
(Being land purchased from pepper company)

Elimination of unrealised profits

Date Journal Entry Debit Credit
31 Dec, 2019 Gain on sale $46,000
To land $46,000
(Being elimination of unrealised profit from sale of land)

3) Pepper Company

Date Journal Entry Debit Credit
31 Dec, 2018 Cash $720,000
Accumulated Depreciation (800,000 / 10) * 4 $320,000
To Equipment $800,000
To gain on sale of equipment $240,000
(Being equipment sold to salt company)

Salt Company

Date Journal Entry Debit Credit
31 Dec, 2018 Equipment $720,000
To cash $720,000
(Being equipment purchased from pepper company)
31 Dec, 2019 Depreciation (720,000 / 6) $120,000
To accumulated depreciation $120,000
(Being depreciation charged on equipment)

Elimination of unrealised gain and restore the equipment to its original cost and adjusted depreciation

Date Journal Entry Debit Credit
31 Dec, 2019 Equipment $80,000
Gain on sale of equipment $240,000
To depreciation $40,000
To Accumulated depreciation $280,000

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ekkarill92 answered 1 year ago
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