On January 1,2014 Saffron Co.recorded a $40,000 profit on the upstream sale of some equipment that had a remaining four-year life under the straight-line depreciation method.The equipment has no salvage value.Saffron had separate income of $100,000 in 2014.The parent company,Pommel Incorporated,owns 90% of Saffron.Pommel would report investment income from Saffron in 2014 of

Question

Quizplus · Accepted Answer

The profit on the upstream sale of equipment is not included in Saffron's separate income of $100,000 and is therefore not allocated to Pommel as investment income. Pommel's investment income from Saffron would be based on Saffron's net income, which is $140,000 ($100,000 separate income + $40,000 profit on sale of equipment). Pommel's 90% share of Saffron's net income is $126,000 (90% x $140,000), so the correct answer is B.