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 $182.$ Pepper$$s shares were trading at around $$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 $1,000\mathrm{.}001,200\mathrm{.}00200\mathrm{.}00240\mathrm{.}00$

Intangible assets $($excluding goodwill$)400\mathrm{.}001,000\mathrm{.}00500\mathrm{.}00800\mathrm{.}00$

$1,400\mathrm{.}00700\mathrm{.}00$

Liabilities $800\mathrm{.}00820\mathrm{.}00340\mathrm{.}00380\mathrm{.}00$

Shareholders$$ equity $600\mathrm{.}00360\mathrm{.}00$

$1,400\mathrm{.}00700\mathrm{.}00$

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 $$1\mathrm{.}000$ for a $40\%$ interest in Salt. If so$,$ Pepper saved $$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?