X Inc. owns 80% of Y Inc. During 2020, 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 is the after-tax dollar value of X's unrealized profits during the year on its sales to Y?

Question

Quizplus · Accepted Answer

X Inc.'s unrealized profit on sales to Y is $1,000 (50% of $10,000 * 20% gross profit). After accounting for a 40% tax rate, the after-tax unrealized profit is $600 ($1,000 * (1 - 0.40)).

X Inc Owns 80% of Y Inc