X Inc. owns 80% of Y Inc. During 2012, X Inc. sold inventory to Y for $10,000. Half of this inventory remained in Y's warehouse at year end. Y Inc. sold Inventory to X Inc. for $5,000. 40% of this inventory remained in X's warehouse at year end. Both companies are subject to a tax rate of 40%. The gross profit percentage on sales is 20% for both companies. Unless otherwise stated, assume X Inc. uses the cost method to account for its Investment in Y Inc. Assume that Y Inc. reported an after-tax net income of $20,000 in 2012, what would be Y's adjusted net income for the year?

Question

Quizplus · Accepted Answer

The unrealized profit in Y's ending inventory from X's sale is $1,000 (50% of $10,000 * 20%). The unrealized profit in X's ending inventory from Y's sale is $400 (40% of $5,000 * 20%). The total unrealized profit is $1,400. After adjusting for tax (40%), the net unrealized profit is $840 ($1,400 * (1 - 0.40)). Y's adjusted net income is $20,000 - $840 = $19,160.

X Inc Owns 80% of Y Inc