On January 1, 20X1, Pepper purchased 70% interest in Salt for $420K. At the time of the purchase, Salt’s assets and liabilities were equal to book value except for Inventory, Building and Land (which had fair values in excess of book value of $10K, $30K and $45K respectively). Net Asset BV at the time of purchase was $440K. Included in the $420K purchase price was a covenant not to compete. The covenant was value at $30K and is for a two year period. At the time of the purchase, it was determined that the all of Salt’s depreciable assets had a remaining 5 year life and inventory had a 2 month life.The following events occurred during the year:Event #1 Salt sold inventory with an originally cost of $369K to Pepper for $450K. Pepper sold 70% to a third party for $600K and had 30% of the inventory remaining at the end of the yearEvent #2 On January 1, 20X1 Salt borrowed $750K from Pepper at 8% interest. Salt paid zero down on the principle during the year. However, Salt paid $35K of the interest and had a payable to Pepper at year end for the remaining difference. Pepper had a corresponding receivable on its books at the end of the yearEvent #3 On January1, 20X1, Salt sold equipment (that was originally purchased for $230K and had an associated depreciation of $40K). Salt sold the equipment to Pepper for $225K. At the time of sale, it was determined that the equipment had a five year life remainingEvent #4 Salt paid Pepper $135K for accounting and tax services during the year. Pepper incurred $97K in costs providing those services to Salt. Relating to Event #1, what will be the elimination entry in the following year (20X2) to recognized the Realized Gain when the remaining inventory is sold?

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FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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On January 1, 20X1, Pepper purchased 70% interest in Salt for $420K. At the time of the purchase, Salt’s assets and liabilities were equal to book value except for Inventory, Building and Land (which had fair values in excess of book value of $10K, $30K and $45K respectively). Net Asset BV at the time of purchase was $440K. Included in the $420K purchase price was a covenant not to compete. The covenant was value at $30K and is for a two year period. At the time of the purchase, it was determined that the all of Salt’s depreciable assets had a remaining 5 year life and inventory had a 2 month life.

The following events occurred during the year:

Event #1 Salt sold inventory with an originally cost of $369K to Pepper for $450K. Pepper sold 70% to a third party for $600K and had 30% of the inventory remaining at the end of the year
Event #2 On January 1, 20X1 Salt borrowed $750K from Pepper at 8% interest. Salt paid zero down on the principle during the year. However, Salt paid $35K of the interest and had a payable to Pepper at year end for the remaining difference. Pepper had a corresponding receivable on its books at the end of the year
Event #3 On January1, 20X1, Salt sold equipment (that was originally purchased for $230K and had an associated depreciation of $40K). Salt sold the equipment to Pepper for $225K. At the time of sale, it was determined that the equipment had a five year life remaining
Event #4 Salt paid Pepper $135K for accounting and tax services during the year. Pepper incurred $97K in costs providing those services to Salt.

Relating to Event #1, what will be the elimination entry in the following year (20X2) to recognized the Realized Gain when the remaining inventory is sold?

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