Question

During 2020 PLANK, Inc. sold inventory costing $400,000 to its 34.0%-owned investee Sentry at a 40.0% markup. At the end of the year Sentry had sold $392,000 of this inventory to unrelated businesses. The amount of pre-tax income that PLANK should recognize in connection with this transaction is a) $143,680. b) $105,600. c) $112,000. d) $141,000.

Answer 1

Your required answer is option C i.e. $112,000

Explanation:

Since Plank, Inc. is selling on 40% markup to his owned investee therfore he can recognize profit only upto 40% of Inventory sold by owned investee to any unrelated business and hence

Senatry sold $392,000 to unrelated business it means this $392,000 is 140% (100% Cost + 40% Markup) for Plank, Inc. and therefor profit element in this sales includes:

So Plank, Inc. can recognize $112,000 as a profit in current year.

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