X Inc Owns 80% of Y Inc

question 16

Multiple Choice

X Inc. owns 80% of Y Inc. During 2012, 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. Assuming that X Inc. used the equity method, what adjustment would have to be made to the investment in Y account to adjust for any unrealized profits on Y's sales to X?

• A) No adjustment would be required.
• B) The account would have to be reduced by $240.
• C) The account would have to be reduced by $192.
• D) The account would have to be reduced by $48.

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Definitions:

Fair Value Concept

An accounting principle that assesses assets and liabilities at their current market value rather than their historical cost.

Impairment Tests

Assessments carried out to determine whether an asset's carrying value exceeds its recoverable amount, indicating a need for value adjustment.

IFRS

International Financial Reporting Standards, which are a set of accounting standards developed by the International Accounting Standards Board (IASB) that guide the preparation of financial statements globally.

GAAP

Generally Accepted Accounting Principles are the set of rules, standards, and practices formally accepted as guidelines for financial reporting in the U.S.