Use the Case Framework

i. Introduction

ii. Identify users and their needs/goals

Need help with iii, iv, v

iii. Issues

iv. Details and Analysis

v. Recommendations

On December 31, year 7, pepper company, a public company, agreed to a business combination with salt limited, an unrelated private company. pepper issued 82 of its common shares for all 50 of the outstanding common shares of salt. this transaction increased the number of outstanding pepper shares from 100 to 182. Peppers shares were trading at around $20 per share in days leading up to the business combination. The condensed balance sheets for the two companies on this date were as follows:

	Pepper			Salt
	Carrying Amount	Fair Value		Carrying Amount	Fair Value
Tangible assets	1,000.00	1,200.00		200.00	240.00
Intangible assets (excluding goodwill)	400.00	1,000.00		500.00	800.00
	1,400.00			700.00
Liabilities	800.00	820.00		340.00	380.00
Shareholders equity	600.00			360.00
	1,400.00			700.00

On January 1, Year 8, Pepper sold 40% of its investment in Salt to an unrelated third party for $1,000 in cash. The CFO at Pepper stated that Salt must have been worth $2,500 if the unrelated third party was willing to pay $1.000 for a 40% interest in Salt. If so, Pepper saved $860 by buying Salt for only $1,640. Accordingly, the CFO wants to recognize a gain of $860 in the Year 7 income statement to reflect the true value of Salt shares

You have been asked by the CFO to prepare a presentation to senior management on the accounting implications for the business combination and subsequent sale of 40% of the investment. She would like you to consider two alternative methods of valuing Salt on the consolidated balance at the date of acquisition-one based on cost of purchase and one based on the implied value of the subsidiary based on the sales price on January 1. Year 8.

Required Prepare this presentation, answering the following questions:

(a) How would Pepper's consolidated balance sheet differ at the date of acquisition under the two different valuation alternatives? Which method best reflects economic reality? Which method is required by GAAP?

(b) How would Pepper's consolidated balance sheet look after the sale of the 40% interest in Salt to the unrelated third party under the two alternatives?