Pearson Company owns 90% of the outstanding common stock of Spring Company. On J

ID: 2720352 • Letter: P

Question

Pearson Company owns 90% of the outstanding common stock of Spring Company. On January 1, 2014, Spring
Company sold equipment to Pearson Company for $200,000. Spring Company had purchased the equipment for
$300,000 on January 1, 2009, and had depreciated it using a 10% straight-line rate. The management of Pearson
Company estimated that the equipment had a remaining useful life of five years on January 1, 2014. In 2015,
Pearson Company reported $150,000 and Spring Company reported $100,000 in net income from their independent
operations (including sales to affiliates).

Explanation / Answer

Book value of the equipment as on Jan-1 , 2014 in the Hand sof Spring Company

= 300,000- 300,000*10%*5

= $150,000

Sold to Pearson at $200,000

Unrealised profit = (200,000-150,000)*90%

= $45,000

Incorrect Dep charged by Perason = 50,000/5

= $10,000

Cons P/L = (150,000-10,000) +( 100,000-50,000)*0.9

= 140,000 + 45,000

= $185,000