Question

Equity Method Investment with Intercompany Sales and Profits

The Coca-Cola Company owns 21 percent of the voting stock of Coca-Cola FEMSA, acquired at book value. Assume that Coca-Cola FEMSA reports income of $3 million for 2013. Coca-Cola FEMSA regularly sells canned beverages to Coca-Cola at a markup of 20 percent on cost. During 2013 Coca-Cola FEMSA's sales to Coca-Cola totaled $15 million. Coca-Cola's January 1, 2013, inventories include $810,000 purchased from Coca-Cola FEMSA. Coca-Cola's December 31, 2013, inventories include $729,000 purchased from Coca-Cola FEMSA.

Prepare the 2013 journal entry on Coca-Cola's books to recognize its income from Coca-Cola FEMSA under the equity method.

Please show formulas!!

Answer 1

Answer-

Computation of equity in Net Income of Coco - Cola FEMSA:
	Share of Coca cola's FEMSA under reported method ($3 million X 21%)	=	$ 630,000
Add:	Realized profit on intercompany sales {21% x [$810,000 -($810,000/1.20)]}	=	$ 28,350
Less:	Unrealized profit on intercompany sales {21% x [$729,000 -($729,000/1.20)]}	=	$ 25,515
	Equity in Net Income of Coco - Cola FEMSA	=	$ 632,835
	Account Titles and Explaination	Debit	Credit
	Investment in Coco - Cola FEMSA	$ 632,835
	Equity in Income of Coco - Cola FEMSA		$ 632,835