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. What effect (if any) would Y's unrealized profits on its sales to X have on the non-controlling interest account on the consolidated balance sheet?

Question

Quizplus · Accepted Answer

The unrealized profit on Y's sales to X is $5,000 * 40% * 20% = $400. The non-controlling interest's share of this unrealized profit is 20% (since X owns 80% of Y), which is $400 * 20% = $80. After tax adjustment (40% tax rate), the effect is $80 * (1 - 0.4) = $48. Thus, there would be a decrease to the non-controlling interest account for the amount of $48.

X Inc Owns 80% of Y Inc