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Jones Corp owns 30% of Klein Inc for $250,000.During 2002,there were numerous intercompany inventory sales.During the year,Jones sold Inventory for $50,000 to Klein.At year-end,half of this Inventory was still in Klein's possession.Also during 2002,Klein sold Inventory for $60,000 to Jones.At year-end,20% of this Inventory was still in Jones' possession.During the year,Klein declared a net income and paid dividends in the amount of $20,000 and $5,000 respectively.Klein's fair values approximated its book values on the date of acquisition.Both companies price all sales at a 25% mark-up above cost.In addition,both companies are subject to an effective tax rate of 40%.
-What is the amount of unrealized after-tax profit from downstream sales deducted from the Investment in Klein account during 2002?

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Jones Corp owns 30% of Klein Inc for $250,000.During 2002,there were numerous intercompany inventory sales.During the year,Jones sold Inventory for $50,000 to Klein.At year-end,half of this Inventory was still in Klein's possession.Also during 2002,Klein sold Inventory for $60,000 to Jones.At year-end,20% of this Inventory was still in Jones' possession.During the year,Klein declared a net income and paid dividends in the amount of $20,000 and $5,000 respectively.Klein's fair values approximated its book values on the date of acquisition.Both companies price all sales at a 25% mark-up above cost.In addition,both companies are subject to an effective tax rate of 40%.
-What is the amount of unrealized after-tax profit from downstream sales deducted from the Investment in Klein account during 2002?

Quizplus · Accepted Answer

To calculate the unrealized after-tax profit from downstream sales, we need to first calculate the total downstream sales:
Jones Corp sold $50,000 worth of inventory to Klein Inc at a 25% markup above cost, so the cost of the inventory would be $40,000 ($50,000/1.25). 
Klein Inc sold $60,000 worth of inventory to Jones Corp at a 25% markup above cost, so the cost of the inventory would be $48,000 ($60,000/1.25).

The total downstream sales would be $50,000 - $40,000 = $10,000 and $60,000 - $48,000 = $12,000, respectively.

To calculate the unrealized after-tax profit from downstream sales, we need to multiply the total downstream sales by the investor's percentage ownership (30%) and the effective tax rate (40%), and then subtract the result from the Investment in Klein account:

Unrealized after-tax profit from Jones' sale to Klein = ($10,000 x 30% x 40%) = $1,200
Unrealized after-tax profit from Klein's sale to Jones = ($12,000 x 30% x 40%) = $1,440

The total unrealized after-tax profit from downstream sales is $1,200 + $1,440 = $2,640. However, we're only interested in the amount that was deducted from the Investment in Klein account. Since only half of the inventory that Jones sold to Klein and 20% of the inventory that Klein sold to Jones is still in possession at year-end, we need to adjust the unrealized profit accordingly.

For Jones' sale to Klein, only half of the profit is unrealized, so the amount to deduct from the Investment in Klein account is $1,200/2 = $600.
For Klein's sale to Jones, only 20% of the profit is unrealized, so the amount to deduct from the Investment in Klein account is $1,440 x 20% = $288.

The total amount to deduct from the Investment in Klein account is $600 + $288 = $888. When we deduct this amount from the initial investment of $250,000, we get $249,112. Since this amount is not included in any of the answer choices, the answer must be D) Nil.

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