Equity Method > Inter-company Transactions (Upstream/Downstream)

Part 4 is straightforward for me, but I’m getting confused with Part 1,2 and 3.

Question: X owns 35% of Y and uses the equity method of accounting. At the end of last year, the closing balance sheet showed the investment as “Investment in Y $500,000”. The following business transactions occurred during the year. Identify how they would be reflected in X’s financial statements.

Part 1 (Upstream Inventory Sale): Y had sales of $60,000 to X. Y’s gross margin was 45%. X sold $50,000 of these goods to external customers during the year but still had $10,000 in inventory at the end of the year.

I know I have to reduce X’s income by the unrealized profit from the inventory unsold to 3rd parties, but what what do I reduce it from?

Part 2 (Downstream Inventory Sale): X had $20,000 sales to Y with a gross margin of 30%. At the end of the year, $6,000 of these goods were still in Y’s inventory.

Part 3 (Upstream Land Sale): Y sold its land to X for $450,000. The land had originally cost $300,000 and its fair value the date that X acquired Y was $400,000. Y reported a gain of $150,000 on its income statement.

Part 4: Y reported $100,000 income during the year and paid $20,000 dividends during the year.

Beginning Investment in Y: 500,000

X’s Share of Y’s Income (35% x 100,000) = 35,000

Less Dividends (35% x 20,000) = -7000

Ending Investment in Y: 528,000

Hope this will help you : http://www.iasplus.com/en/meeting-notes/iasb/2013/iasb-july-2013/ias-28