Problem #4 (Upstream sales Concept is similar to Exercise #5-5):

Snail Corporation regularly purchases merchandise from their 90%-owner, Pepper Corporation. Pepper purchased the 90% interest at a cost equal to 90% of the book value of Snail's net assets. At the time of acquisition, the book values and fair values of Snail's assets and liabilities were equal. Pepper makes their sales to Snail at 120% of cost. In 2012, Snail reported net income of $460,000, and made purchases totaling $172,000 from Pepper. Although Snail had no inventory on hand at the beginning of 2012 that they had purchased from Pepper, at year end, they had $51,600 of this merchandise in inventory.

Required:

1. Determine the unrealized profit in Snail's ending inventory at December 31, 2012.

2. Compute Pepper's income from Snail for 2012.