Find Corp Is a Joint Operation in Which Seek Inc

question 31

Multiple Choice

Find Corp. is a joint operation in which Seek Inc. has a 20% interest. Seek reports its investment in Find using proportionately adjusted financial statements. A contractual agreement gives Seek proportionate rights (20%) to all of Finds' assets and proportionate responsibilities (20%) for all of Find's liabilities. Seek uses the equity method to record its investment but has yet to make any journal entries related to its investment in Find for 2020. The financial statements of both companies as at December 31, 2020, are shown below.
$\begin{array}{|l|r|r|}\hline & \text { Seek Inc. } & \text { Find Corp. } \\\hline \text { INCOME STATEMENTS } & & \\\hline \text { Sales } & \$ 800,000 & \$ 200,000 \\\hline \text { Cost of Sales } & \$ 400,000 & \$ 100,000 \\\hline \text { Other Expenses } & \underline{\$ 200,000} & \underline{\$ 60,000} \\\hline \text { Net Income } & \underline{\mathbf{\$ 2 0 0 , 0 0 0}} & \underline{\mathbf{4 4 0 , 0 0 0}} \\\hline \text { BALANCE SHEETS } & & \\\hline \text { Miscellaneous Assets } & \$ 600,000 & \$ 300,000 \\\hline \text { Inventory } & \$ 120,000 & \$ 60,000 \\\hline \text { Investment in Find } & \underline{\$ 180,000} & \\\hline \text { Total Assets } & \underline{\$ 900,000} & \$ \mathbf{3 6 0 , 0 0 0} \\\hline \text { Miscellaneous Liabilities } & \$ \$ 160,000 & \$ 80,000 \\\hline \text { Common Shares } & \$ 200,000 & \$ 100,000 \\\hline \text { Retained Earnings, Jan 1 } & \$ 340,000 & \$ 140,000 \\\hline \text { Net Income } & \underline{\$ 200,000} & \underline{\$ 40,000} \\\hline \text { Total Liabilities \& Equity } & \underline{\mathbf{\$ 9 0 0 , 0 0 0}} & \underline{\mathbf{\$ 3 6 0 , 0 0 0}} \\\hline\end{array}$
During 2020, Seek sold merchandise totaling $120,000 to Find and recorded a gross profit of 50% on these sales. At the end of 2020, Find's inventory contained $30,000 worth of merchandise purchased from Seek. Find also owed $50,000 to Seek at the end of 2020.
Both companies are subject to a 40% tax rate.
What is the total amount of intercompany pre-tax profits in ending inventory?

• A) $3,000
• B) $15,000
• C) $20,000
• D) $30,000

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