Big Corp purchased 40% of Klein Inc. for $400,000 on January 1, 2019. Big has significant influence. At the time of purchase, the fair value of Klein's net assets was the same as the book value of net assets except for a building owned by Klein. The building had a 10 year remaining life, and the fair value was $400,000 greater than its book value. Klein uses the straight line depreciation method. 

During 2019, Big sold inventory to Klein for $120,000. At year end, 70% of this inventory was still in Klein's possession. Big prices all sales at a 40% gross profit rate. For 2019, Klein declared a net income of $80,000 and paid dividends of $30,000. The tax rate is 40%. Show calculations for possible part marks.

a) How much is Big's unrealized after tax profit from sales to Klein during 2019?

b) What is the investment income for Big for 2019?

c)What is the value of Big's investment in Klein account at year end 2019?

Answer rating: 100% (QA)

a To calculate Bigs unrealized aftertax profit from sales to Klein during 2019 we need to use the gross profit method The gross profit on the inventor... View the full answer