Problem
On January 1, 20X1, Pepper purchased 70% interest in Salt for $420K. At the time of the purchase, Salt's assets and liabilities were equal to book value except for Inventory, Building and Land (which had fair values in excess of book value of $10K, $30K and $45K respectively). Net Asset BV at the time of purchase was $440K. Included in the $420K purchase price was a covenant not to compete. The covenant was value at $30K and is for a two year period. At the time of the purchase, it was determined that the all of Salt's depreciable assets had a remaining 5 year life and inventory had a 2 month life.
The following events occurred during the year:
1. Event #1 Salt sold inventory with an originally cost of $369K to Pepper for $450K. Pepper sold 70% to a third party for $600K and had 30% of the inventory remaining at the end of the year
2. Event #2 On January 1, 20X1 Salt borrowed $750K from Pepper at 8% interest. Salt paid zero down on the principle during the year. However, Salt paid $35K of the interest and had a payable to Pepper at year end for the remaining difference. Pepper had a corresponding receivable on its books at the end of the year
3. Event #3 On January1, 20X1, Salt sold equipment (that was originally purchased for $230K and had an associated depreciation of $40K). Salt sold the equipment to Pepper for $225K. At the time of sale, it was determined that the equipment had a five year life remaining
4. Event #4 Salt paid Pepper $135K for accounting and tax services during the year. Pepper incurred $97K in costs providing those services to Salt
How much of the total differential will be allocated to Goodwill?