Question

Rin owns 90% of Stempy Inc. On January 1, 2019, the investment in Stempy account had a balance of $350,000 and Stempy's common shares and retained earnings on that date were valued at $200,000 and $100,889 respective ly. Moreover, the assets to which the unamortized acquisition differential relates had a remaining life of 10 years on that date. Rin uses the equity method to account for its investment in Stempy. 

Rin sold depreciable assets to Stempy on January 1, 2019 at an after-tax gain of $10,000. On January 1, 2020, Stempy sold depreciable assets to Rin at an after-tax gain of $20,000. Both assets are being depreciated over 10 years. 

The tax rate for both companies is zero. 

Stempy's Net Income and Dividends for 2019 and 2020 are shown below. 

$$ \begin{array}{|l|r|r|} \hline & 2019 & 2020 \\ \hline \text { Net Income } & \$ 80,000 & \$ 120,000 \\ \hline \text { Dividends } & \$ 20,000 & \$ 30,000 \\ \hline \end{array} $$

a) How much intercompany (after-tax) profit was realized during 2020 on Stempy's 2020 sale of assets to Rin? What journal entry would Rin make in its own financial records to record the realization of these after-tax profits? (you may exclude that date and explanation for the journal entry) (3 marks) 

b) What is the total amount of unrealized profit (after-tax) remaining at the end of 2020 (i.e. the total amount to be eliminated on consolidation as at the end of 2020)? (3 marks)

Answer 1

Intercompany (after tax) profit realised	$1,000
(10,000 - (10,000 * 90%)
Option $1,000 is the correct option

Answer 2