Reference no: EM132573453

Question - Hot Inc. owns 60% of Cold Inc, which it purchased on January 1, 2019 for $540,000. On that date, Cold's retained earnings and common shares were valued at $100,000 and $250,000, respectively. Cold's book values approximated its fair values on that date, with the exception of the company's inventory and a patent identified on acquisition. The patent had an estimated useful life of 10 years from the date of acquisition. The inventory had a book value that was $10,000 in excess of its fair value, while the patent had a fair value of $50,000. Hot uses the equity method to account for its investment in Cold Inc. The inventory on hand on the acquisition date was sold to outside parties during the year.

Hot Inc. sold depreciable assets to Cold on January 1, 2019, at a loss of $15,000.

On January 1, 2020, Cold sold depreciable assets to Hot at a gain of $10,000. Both assets had a remaining useful life of 5 years on the date of their intercompany sale.

During 2019, Cold sold inventory to Hot in the amount of $18,000. This inventory was sold to outside parties during 2020.

During 2020, Hot sold inventory to Cold for $45,000. One third of this inventory was still in Cold's warehouse on December 31, 2020.

All sales (both internal and external) are priced to provide the seller with a mark-up of 50% above cost.

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

2019 2020

Net Income $180,000 $200,000

Dividends $20,000 $60,000

Both companies are subject to a tax rate of 20%.

Required - What is the Realized and Unrealized Profits for 2019 and 2020 for both companies. Show your figures before and after tax.