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 realized profits during the year on its sales to Y?

A) $2,000
B) $1,000
C) $600
D) $400

Question

Arely Tamayo · Accepted Answer

Final Answer : C, Explanation :  X Inc. sold inventory to Y Inc. for $10,000 with a gross profit percentage of 20%, so the cost of the inventory would be $8,000. Since half of the inventory remained in Y's warehouse at year-end, X should recognize $4,000 ($8,000/2) as cost of goods sold and $6,000 ($10,000-$4,000) as revenue.Thus, X's realized profits on sales to Y is $1,200 ($6,000 x 20%).The tax rate is 40%, so the after-tax dollar value would be $720 ($1,200 x (1-0.4)).Therefore, the answer is C ($720).

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