Question

The Coca-Cola Company owns 28 percent of the voting stock of Coca-Cola FEMSA, acquired at book value. Assume that Coca-Cola FEMSA reports income of $5 million for 2019. Coca-Cola FEMSA regularly sells canned beverages to Coca-Cola at a markup of 35 percent on cost. During 2019 Coca-Cola FEMSA’s sales to Coca-Cola totaled $25 million. Coca-Cola’s January 1, 2019, inventories include $1,350,000 purchased from Coca-Cola FEMSA. Coca-Cola’s December 31, 2019, inventories include $1,215,000 purchased from Coca-Cola FEMSA. Required Prepare the 2019 journal entry on Coca-Cola's books to recognize its income from Coca-Cola FEMSA under the equity method.

Answer 1

Answer:

Investment in Coca-Cola FEMSA            $1,409,800.00

Equity in income of Coca-Cola FEMSA                               $1,409,800.00

Explanation:

Coca-Cola Company  share of Coca-Cola FEMSA reported income  =

28% * $5,000,000= $1,400,000.00

Realized profit on intercompany sales = 28% * ($1,350,000 - ($1,350,000/1.35))= $98,000.00

Unrealized profit on intercompany sales = 28% * ($1,215,000 -($1,215,000/1.35)) = $88,200.00

Equity in Net Income of Coca-Cola FEMSA  =

$1,400,000.00 + $98,000.00-  $88,200.00 = $1,409,800.00

Journal entry:

Investment in Coca-Cola FEMSA             $1,409,800.00

Equity in income of Coca-Cola FEMSA                               $1,409,800.00