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?

A) There would be no effect.
B) There would be an increase to the non-controlling interest account for the amount of $72.
C) There would be a decrease to the non-controlling interest account for the amount of $48.
D) There would be an increase to the non-controlling interest account for the amount of $48

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Aries Queen · Accepted Answer

Final Answer : C, Explanation :  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% = $600To determine the after-tax unrealized profit, we need to multiply by the tax rate of 40%:$600 x 40% = $240Since X Inc. owns 80% of Y Inc., the NCI owns 20%. Therefore, the NCI's share of the unrealized profit is:$240 x 20% = $48This amount represents a decrease to the NCI account on the consolidated balance sheet.

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