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 Y's realized profits during the year on its sales to X?

Question

Quizplus · Accepted Answer

- Y Inc. sold inventory to X Inc. for $5,000.
- Gross profit percentage is 20%, so the cost of goods sold (COGS) for Y is $4,000 ($5,000 * 80%).
- Y's realized profit on this sale is $1,000 ($5,000 - $4,000).
- After-tax profit for Y is $600 ($1,000 * (1-40%))
- Therefore, the answer is B: $360 ($600 * 60%).

X Inc Owns 80% of Y Inc