Pepper, Inc., purcashed 80% of the outstanding stock of the Salt Company on January 01, 2017, for $2,750,000 cash.
At that date, Salt Company’s assets and liabilities had the following fair values and book values:
| FMV | BV | |
| cash and receivables | 1400000 | 1400000 |
| inventory | 1792000 | 1600000 |
| plant assets | 5250000 | 5040000 |
| curret liabilities | (3500000) | (3500000) |
| long term debt | (1800000) | (1800000) |
All of Salt Company’s inventory was sold in the following year.
Salt Company depreciates plant assets over a 20-year life.
Pepper, Inc. amortizes debt premiums and discounts over its 6 years to maturity using straight-line amortization.
Pepper, Inc. accounts for this investment using the equity method.
The financial statements for both companies for the year ended December 31, 2017, are shown below:
INCOME STATEMENT
For the Period Ending December 31 2017
(a)Pepper, Inc. (b)Salt Company
Revenue (a)$14,000,000 (b)$7,000,000
Income From Sub. (a)678,000 (b)0
Total Revenue (a)14678000 (b)7000000
Cost Of Sales (a)8,000,000 (b)4,250,000
Operating Expenses (a)2,500,000 (b)1,600,000
Interest Expense (a)250,000 (b)150,000
Total Expenses (a)10750000 (b)6000000
Net Income (a)3928000 (b)1000000
STATEMENT OF
RETAINED EARNINGS
–
Begining Balance (a)$4,000,000 (b)$2,540,000
add: net income (a)3928000 (b)1000000
Deduct: Dividends (a)600,000 (b)120,000
Ending Balance (a)7328000 (b)3420000
| Balance Sheet | |||||
| As of December 31 2015 | |||||
| Pepper, Inc. | Salt Company | ||||
| Assets | |||||
| Cash and Receivables | $ 2,800,000 | $ 1,200,000 | |||
| Inventory | 3,600,000 | 1,070,000 | |||
| Plant Assets | 5,500,000 | 4,800,000 | (net) | ||
| Accumulated Depreciation | (2,500,000) | ||||
| Investment in Sub. | 3,332,000 | ||||
| Total assets | 12732000 | 7070000 | |||
| Liabilities and Equities | |||||
| Current Liabilities | $ 1,654,000 | $ 1,400,000 | |||
| Long-Term Debt | 2,250,000 | 1,750,000 | |||
| Capital Stock | 1,500,000 | 500,000 | |||
Retained Earnings 7328000 3420000
Total liab. and equity 12732000 7070000
(1)Using the above data and Excel, prepare a consolidated worksheet for the period ending December 31, 2017. Be sure all input data is in a separate part of the schedule so that the solution will change with changes
(2)Include subschedules to calculate goodwill and the equity method subsidiary income for the period
(3)By linking to the work paper prepared in part 1, prepare a formal consolidated income statement, retained earnings statement, and balance sheet as of December 31, 2017
(a) is for pepper (b) is for salt
