Pepper Company Owned 60,000 of Salt Company's 100,000 Outstanding Shares

Multiple Choice

Pepper Company owned 60,000 of Salt Company's 100,000 outstanding shares. On January 2, 20X3, Salt purchased 20,000 of its outstanding shares from the NCI for $70,000. Pepper purchased its shares on January 1, 20X1, at which time the fair value of Salt exceeded its book value by $50,000. This difference was due to machinery that was undervalued and had a remaining life of 5 years. On December 31, 20X2, Salt Company had the following stockholders' equity:
Common stock, $1 par
$100,000
Paid-in capital in excess of par
50,000
Retained earnings
270,000
Assuming Pepper uses the equity method to account for its investment in Salt, the adjustment to the Pepper's books would include:

A) a credit to Retained Earnings
B) a credit to Paid-in Capital in Excess of Par
C) a credit to Investment of
D) a debit to Paid-in Capital in Excess of Par