Question

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

Answer 1

Answer:

December 31, 2013, revenue from investment in Coca Cola FEMSA

Dr Investment in Coca Cola FEMSA 1,635,000

    Cr Investment revenue 1,635,000

Explanation:

Under the full equity method, when Coca Cola FEMSA reports net income, the investment account will increase in a proportional way, and that increase is considered investment revenue.

E.g. Coca Cola Company owns 32% of stocks and reported net income is $5,000,000, so investment revenue = $5,000,000 x 32%  = $1,600,000

But we must also include any realized/unrealized profits on intercompany transactions:

realized profits = markup x January 1 inventories = 35% x ($1,350,000 - $1,350,000/1.35) = $350,000

unrealized profits =  markup x December 31 inventories = 35% x ($1,215,000 - $1,215,000/1.35) = $315,000

total investment revenue = % of net income reported + realized profits - unrealized profits = $1,600,000 + $350,000 - $315,000 = $1,635,000

The journal entry should be:

December 31, 2013, revenue from investment in Coca Cola FEMSA

Dr Investment in Coca Cola FEMSA 1,635,000

    Cr Investment revenue 1,635,000