Question

Problem 2 (40%)

Trial balance data for Pepper and Salt as of December 31, 2018 follows. Pepper company acquired 100% of the shares of Salt at $(500,000) when the book value of Salt’s net assets was equal to $350,000. At that date the fair value of Building and equipment was $20,000 more than the book value and the value of Land $50,000 above book value. Building and equipment are depreciated on a 10-year basis. At December 31, 2018, Pepper Company concluded that goodwill involved in the acquisition of Salt has been impaired and the correct carrying value was $20,000. Pepper uses the equity method to account for investments.

	Pepper Company		Salt Company
	Dr	Cr	Dr	Cr
Cash	500,000		99,000
Accounts receivable	168,000		82,000
Inventory	212,000		94,000
Investment in Salt	0
Land	210,000		91,000
Building and Equipment	714,000		190,000
Cost of Goods Sold	196,000		98,000
depreciation Expense	47,000		7,000
Selling & administrative Expense	223,000		40,000
Dividends declared	90,000		24,000
Accumulated Depreciation		444,000		16,000
Accounts Payable		64,000		49,000
Bonds Payable		182,000		50,000
Common Stock		483,000		200,000
Retained Earnings		356,300		150,000
Sales		830,700		260,000
Income from Salt				0
Total	2,360,000	2,360,000	725,000	725,000

Instructions:

a) Prepare the journal entries in Pepper Company books to record the transaction related to the investment in Salt for year 2018.

( 500,000$)

b) Post the previous transactions to   the ledger and find new balances at the end of year 2018.

c) Prepare the journal entries in the books of Pepper and the eliminating journal entries for the second year (2019) assuming Salt declared and paid 20,000 of cash dividends and determined a net income of 90,000.

Answer 1

	In the books of Pepper Company
	Calculation of Goodwill arising on acquisition of shares of Salt Co.
	Particulars	$
	Book value of net assets	3,50,000
	Add : Adjustments for fair value
	Building and equipment	20,000
	Land	50,000
	Fair value of net assets	4,20,000
	100% shares acquired so fair value (A)	4,20,000
	Fair value of consideration paid (B)	5,00,000
	Amount paid for Goodwill (B)-(A)	80,000
	Calculation of net income of Salt Company for 2018
	Particulars	$
	Sales	2,60,000
	Less : Cost of goods sold	-98,000
	Less : Depreciation expense	-7,000
	Less : Selling and administrative expense	-40,000
	Net income	1,15,000
	a) Prepare the journal entries in Pepper Company books to record the transaction related to the investment in Salt for year 2018.
	Ans.
	Account	Debit $	Credit $
1	Investment in Salt Company	5,00,000
	Cash/Bank		5,00,000
	(100% of shares of Salt Company acquired)
2	Goodwill impaired	60,000
	Investment in Salt Company		60,000
	(Goodwill involved in acquisition of Salt Company
	$80,000 determined as impaired to $20,000)
3	Investment in Salt Company	1,15,000
	Income from Salt Company		1,15,000
	(Net income received from Salt Company for 2018)
4	Cash/Bank	24,000
	Investment in Salt Company		24,000
	(Dividend received from Salt Company for 2018)