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X Inc.owns 80% of Y Inc.During 2009,X Inc sold inventory to Y for $10,000.Half of this inventory remained in Y's warehouse at year end.Half of this inventory remained in Y's warehouse at year end.Also during 2009,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 50%.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.
-Assuming that X Inc.used the equity method,what adjustment would have to be made to the investment in Y account to adjust for any unrealized profits on Y's sales to X?

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If X Inc. used the equity method, it would have to adjust its investment in Y for any unrealized profits on Y's sales to X. Y Inc’s gross profit on the sale to X is $1,000 ($5,000 x 20%) and 40% of this inventory remained in X's warehouse, so 40% of the unrealized profit is $400 ($1,000 x 40%). Therefore, X's investment in Y would have to be reduced by $160 ($400 x 80%).

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