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P Company owns 85% of S Company. P Company sells merchandise to S Company at 20%...

P Company owns 85% of S Company. P Company sells merchandise to S Company at 20% above cost (gross profit). During 2011 and 2012, such sales amounted to $400,000 and $500,000, respectively. At the end of each year, S Company had sold all of inventory purchased from P to third parties. Calculate the amount of unrealized inventory profit for 2011 and 2012?

a.   $400,000 for 2011 and $500,000 for 2012

b.   $80,000 for 2011 and $100,000 for 2012

c.   $0 for 2011 and $100,000 for 2012

d.   $80,000 for 2011 and $0 for 2012

e.   $0 for 2011 and $0 for 2012

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Answer #1

Answer is option e) $0 for 2011 and $0 for 2012

unrealized inventory profit is calculated on closing Inventory with the S company .Since S Company had sold all of inventory purchased from P to third parties there is no closing inventory with S company. thus there is no unrealized profit on inventory

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