diff --git a/services/core/java/com/android/server/wm/ActivityRecord.java b/services/core/java/com/android/server/wm/ActivityRecord.java
index 2dad9102110ce..2ebf8d9ee3881 100644
--- a/services/core/java/com/android/server/wm/ActivityRecord.java
+++ b/services/core/java/com/android/server/wm/ActivityRecord.java
@@ -8242,8 +8242,12 @@ final class ActivityRecord extends WindowToken implements WindowManagerService.A
             if (screenResolvedBounds.width() <= parentAppBounds.width()) {
                 float positionMultiplier = mLetterboxUiController.getHorizontalPositionMultiplier(
                         newParentConfiguration);
-                offsetX = (int) Math.ceil((parentAppBounds.width() - screenResolvedBounds.width())
-                        * positionMultiplier);
+                offsetX = Math.max(0, (int) Math.ceil((parentAppBounds.width()
+                        - screenResolvedBounds.width()) * positionMultiplier)
+                        // This is added to make sure that insets added inside
+                        // CompatDisplayInsets#getContainerBounds() do not break the alignment
+                        // provided by the positionMultiplier
+                        - screenResolvedBounds.left + parentAppBounds.left);
             }
         }
 
@@ -8253,8 +8257,12 @@ final class ActivityRecord extends WindowToken implements WindowManagerService.A
             if (screenResolvedBounds.height() <= parentAppBounds.height()) {
                 float positionMultiplier = mLetterboxUiController.getVerticalPositionMultiplier(
                         newParentConfiguration);
-                offsetY = (int) Math.ceil((parentAppBounds.height() - screenResolvedBounds.height())
-                        * positionMultiplier);
+                offsetY = Math.max(0, (int) Math.ceil((parentAppBounds.height()
+                        - screenResolvedBounds.height()) * positionMultiplier)
+                        // This is added to make sure that insets added inside
+                        // CompatDisplayInsets#getContainerBounds() do not break the alignment
+                        // provided by the positionMultiplier
+                        - screenResolvedBounds.top + parentAppBounds.top);
             }
         }
 
@@ -10037,6 +10045,7 @@ final class ActivityRecord extends WindowToken implements WindowManagerService.A
                     isLandscape ? shortSide : longSide);
         }
 
+        // TODO(b/267151420): Explore removing getContainerBounds() from CompatDisplayInsets.
         /** Gets the horizontal centered container bounds for size compatibility mode. */
         void getContainerBounds(Rect outAppBounds, Rect outBounds, int rotation, int orientation,
                 boolean orientationRequested, boolean isFixedToUserRotation) {
diff --git a/services/tests/wmtests/src/com/android/server/wm/SizeCompatTests.java b/services/tests/wmtests/src/com/android/server/wm/SizeCompatTests.java
index c9ff15093fea0..0bcee92faad28 100644
--- a/services/tests/wmtests/src/com/android/server/wm/SizeCompatTests.java
+++ b/services/tests/wmtests/src/com/android/server/wm/SizeCompatTests.java
@@ -2909,6 +2909,39 @@ public class SizeCompatTests extends WindowTestsBase {
                 mActivity.getLetterboxInsets());
     }
 
+    @Test
+    public void testUpdateResolvedBoundsHorizontalPosition_leftInsets_appCentered() {
+        // Set up folded display
+        final DisplayContent display = new TestDisplayContent.Builder(mAtm, 1100, 2100)
+                .setCanRotate(true)
+                .build();
+        display.setIgnoreOrientationRequest(true);
+        final DisplayPolicy policy = display.getDisplayPolicy();
+        DisplayPolicy.DecorInsets.Info decorInfo = policy.getDecorInsetsInfo(ROTATION_90,
+                display.mBaseDisplayHeight, display.mBaseDisplayWidth);
+        decorInfo.mNonDecorInsets.set(130, 0,  60, 0);
+        spyOn(policy);
+        doReturn(decorInfo).when(policy).getDecorInsetsInfo(ROTATION_90,
+                display.mBaseDisplayHeight, display.mBaseDisplayWidth);
+        mWm.mLetterboxConfiguration.setLetterboxVerticalPositionMultiplier(0.5f);
+
+        setUpApp(display);
+        prepareUnresizable(mActivity, SCREEN_ORIENTATION_PORTRAIT);
+
+        // Resize the display to simulate unfolding in portrait
+        resizeDisplay(mTask.mDisplayContent, 2200, 1800);
+        assertTrue(mActivity.inSizeCompatMode());
+
+        // Simulate real display not taking non-decor insets into consideration
+        display.getWindowConfiguration().setAppBounds(0, 0, 2200, 1800);
+
+        // Rotate display to landscape
+        rotateDisplay(mActivity.mDisplayContent, ROTATION_90);
+
+        // App is centered
+        assertEquals(mActivity.getBounds(), new Rect(350, 50, 1450, 2150));
+    }
+
     @Test
     public void testUpdateResolvedBoundsHorizontalPosition_left() {
         // Display configured as (2800, 1400).
@@ -3079,6 +3112,39 @@ public class SizeCompatTests extends WindowTestsBase {
                 /* letterboxHorizontalPositionMultiplier */ 1.0f);
     }
 
+    @Test
+    public void testUpdateResolvedBoundsVerticalPosition_topInsets_appCentered() {
+        // Set up folded display
+        final DisplayContent display = new TestDisplayContent.Builder(mAtm, 2100, 1100)
+                .setCanRotate(true)
+                .build();
+        display.setIgnoreOrientationRequest(true);
+        final DisplayPolicy policy = display.getDisplayPolicy();
+        DisplayPolicy.DecorInsets.Info decorInfo = policy.getDecorInsetsInfo(ROTATION_90,
+                display.mBaseDisplayHeight, display.mBaseDisplayWidth);
+        decorInfo.mNonDecorInsets.set(0, 130,  0, 60);
+        spyOn(policy);
+        doReturn(decorInfo).when(policy).getDecorInsetsInfo(ROTATION_90,
+                display.mBaseDisplayHeight, display.mBaseDisplayWidth);
+        mWm.mLetterboxConfiguration.setLetterboxVerticalPositionMultiplier(0.5f);
+
+        setUpApp(display);
+        prepareUnresizable(mActivity, SCREEN_ORIENTATION_LANDSCAPE);
+
+        // Resize the display to simulate unfolding in portrait
+        resizeDisplay(mTask.mDisplayContent, 1800, 2200);
+        assertTrue(mActivity.inSizeCompatMode());
+
+        // Simulate real display not taking non-decor insets into consideration
+        display.getWindowConfiguration().setAppBounds(0, 0, 1800, 2200);
+
+        // Rotate display to landscape
+        rotateDisplay(mActivity.mDisplayContent, ROTATION_90);
+
+        // App is centered
+        assertEquals(mActivity.getBounds(), new Rect(50, 350, 2150, 1450));
+    }
+
     @Test
     public void testUpdateResolvedBoundsVerticalPosition_top() {
         // Display configured as (1400, 2800).