Question

7. Portland, Inc. acquired 80% of Sanders Enterprises on January 5, 2010 During 2018, Sanders sold Portland for $510,000 goods which had cost $346,800. Portland still owned 10% of the goods at the end of the Year In 2019, Sanders sold goods with a cost of $280,000 to Portland Tom $ 350,000, and the buyer still owned 15% of the goods at year-end. For 2019, cost of goods sold was $3,540, 100 for Portland and $820,000 for Sanders. What was the amount by which Equity Investment account was debited or credited in the formal entry (full equity method) for the profit in beginning inventory? Show amount and determine whether the entry was a debit or credit to equity investment.

Answer 1

Portland Inc.
Particulars	Goods sold	Cost of Goods sold	Profit from sale	Unsold portion	Unrealized Profit
During 2018	510,000	346,800	163,200	10%	16,320
2019	350,000	280,000	70,000	15%	10,500
Total unrealized profit					26,820

In case of equity method, all the profit/ (loss) will be adjusted with the investments when earned instead of received.

Unrealized profit, if any has to be reduced from equity investment. Hence, as few goods are unsold, the difference proportionate to be treated as unrealized profit.

Only the proportion of holding to be adjusted = 80% * 26,820 = $ 21,456.

Credit to equity investment for 2018 and 2019 = $ 21,456