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 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

Y Inc.'s unrealized profits on its sales to X Inc. would result in a decrease to the non-controlling interest (NCI) account for the amount of $48. 
To calculate this amount, we first need to determine the unrealized profits on Y Inc.'s sales to X Inc. 
Y Inc. sold inventory to X Inc. for $5,000, and 40% of this inventory remained in X Inc.'s warehouse at year-end. Therefore, Y Inc.'s unrealized profit on this sale to X Inc. is: 
$5,000 x 20% x 60% = $600 
To determine the after-tax unrealized profit, we need to multiply by the tax rate of 40%: 
$600 x 40% = $240 
Since X Inc. owns 80% of Y Inc., the NCI owns 20%. Therefore, the NCI's share of the unrealized profit is: 
$240 x 20% = $48 
This amount represents a decrease to the NCI account on the consolidated balance sheet.

X Inc Owns 80% of Y Inc