THE COCA-COLA COMPANY ACCOUNTING FOR INVESTMENTS IN BOTTLERS Question 1

THECOCA-COLA COMPANY: ACCOUNTING FOR INVESTMENTS IN BOTTLERS

Question1

Foran anchor bottler to be reported as a consolidated subsidiary or asan investment one of the relevant factors considered is control.However, the size of equity stake is not really under consideration.Control in this case means more of two issues. First, the parentcompany has the ability which is not shared and this is mainly thedecision making ability. This ability ensures that the parent companyto guide the ongoing activities of the subsidiary. Second, the mainrelevant factor is the ability of the parent company to exercise itspowers fully. The powers are used to ensure an increase in benefitsderived and as well as capability to minimize the losses incurred.Having different percentages of shares in a company affect theaccounting method used. In case where there is less than 20 percentownership of investee’s voting share by the investor, cost methodis used. In this case, the parent company has no much control oversubsidiary. In instances where the investor has significant influenceover subsidiary, that is, between 20 to 50% then equity method isused (Penman,2009). In fair value, however, no percentages play a critical rolegiven that the parent company does not need to have significant fairvalue at stake, fair value is used.

Question2

Theaccounting of the investments depends on different situations orcircumstances under which the company has control (Penman, 2009). Insituations where the investments can be fully or significantlycontrolled, equity method is applied. The control mainly is of thefinancial and operating policies. Usually when carrying out thiscalculation, the income does incorporate the share of the net incomeby the company. In situations or circumstances where the company doesnot have full control or in situations where the company is not ableto exercise much of its influences on financial and operatingpolicies, cost method of accounting is used. Equity is used as amethod in accounting mainly because the Coca-Cola Company has anumber of subsidiaries which needs accounting and thus it isappropriate for Coca-Cola Company.

Question3

Coca-ColaEnterprises currently uses Equity method to record its transactionand so is the balance sheet. Upon changing to Cost Method, there arenumerous changes that will be observed. The amount that would beshown in the Coca-Cola Company Balance sheet at December 31, 2005upon investment in CCE using the cost method would be $17,232 giventhat shareowner’s equity is debited in the account as it is aninitial investment. When using the cost method there are a number ofchanges that would be noticed. First, gains and losses would not berecognized up to the time the asset is either sold or disposed of.The subsidiaries do not make net income though the parent companyonly realizes revenue in the event that the subsidiary declaringdividend.

Question4

Ininstances where Coca-Cola Company is required to account for CCE as apassive investment, the amount on balance sheet changes.Usually,the accounting for the passive investments is normally reliant on theactivities that the company plans to do with the stock. In instanceswhere CCE might be contemplating to hold the stock indefinitely thenthey will have to use the cost method. In using cost method, theCoca-Cola Company Balance sheet at December 31, 2005 upon investmentin CCE would be $17,232 given that shareowner’s equity is debitedin the account given that it is an initial investment. In this costmethod, the investment is maintained on the balance sheet at theoriginal cost. Thus, any dividends received from the investments aretreated as revenue. Though in instances where the company has plansto sell the stock or at least make it available for sale then thefair value method of accounting is advised.

Question5

Uponconsolidation of CCE investment by Coca-Cola, the ROA (Return onAssets) is calculated by ROA= Net Income/Total Assets. Under thistreatment, 1501/22505, hence we get, 0.06669. The actual ROA is givenby Net Income/Total Assets (Penman, 2009). This implies that,1501/28501, hence we get 0.05266. On carrying out the calculations,net income and the ending balance of total assets in two ratios andignore the tax effects. The ROA figures are a clear indicator of thecompany efficiency it tells how the company converts effectively theinvested money into net income. Thus, the higher the ROA number thebetter. Thus, the consolidated ROA is higher than the actual ROA. Theconsolidated is 6.669% while the actual gives 5.266%. hence forconsolidated the company tends to earn more on less investments.

Question6

Coca-Colauses the equity method for accounting as a methodology. Usually,equity as a method is used when a company is known to own more than20% and less than 50% of another company. In our case, Coca-Cola isjustifiable to use the equity method as it accounted for 36% of CCE.The asset on its balance sheet had a carrying cost of $1.7 billion.Further, Coca-Cola Company is known to have had more than equitypositions in approximately 51 unconsolidated bottlers (Penman, 2009).

References

Penman,S. H. (2009). Accounting for intangible assets: There is also anincome statement. Abacus, 45(3), 358-371.