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The Coca-Cola Company owns 32 percent of the voting stock of Coca-Cola FEMSA, acquired at book...

The Coca-Cola Company owns 32 percent of the voting stock of Coca-Cola FEMSA, acquired at book value. Assume that Coca-Cola FEMSA reports income of $5 million for 2013. Coca-Cola FEMSA regularly sells canned beverages to Coca-Cola at a markup of 35 percent on cost. During 2013 Coca-Cola FEMSA's sales to Coca-Cola totaled $25 million. Coca-Cola's January 1, 2013, inventories include $1,350,000 purchased from Coca-Cola FEMSA. Coca-Cola's December 31, 2013, inventories include $1,215,000 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.

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Answer #1

Hi,

Below is the Journal Entry

Debit Credit
Investment in Coca-Cola FEMSA A/c                    Dr $ 1,611,200.00
To Equity in income of Coca-Cola FEMSA A/c $ 1,611,200.00

Below is the working note to calculate the Intercompany income

Coca-Cola’s share of Coca-Cola FEMSA’s reported income (32% of $5 million) $ 1,600,000.00
+ Realized profit on intercompany sales (32% of ($1,350,000 – ($1,350,000/1.35) $      112,000.00
- Unrealized profit on intercompany sales (32% of ($1,215,000 – ($1,215,000/1.35) $   (100,800.00)
Equity in Net Income of Coca-cola FEMSA $ 1,611,200.00
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