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 acritical role given that the parent company does not need to havesignificant fair value 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

Mostfirm uses accrual bases of accounting in their financial reporting.Under this alternative treatment, the balancesheet of Coca Cola Company will show the amount of cash and cashequivalent (CCE) at this particular date. The changes in the CCE overthe period are however explained in the cash flow statement of thecompany. This amount that is to be shown in the balance sheetinclude marketable securities, Treasury bills and bank accounts.This implies that upon changing to this new method would cause anumerous change in the value of the investment in CCE. The amount tobe shown in the balance sheet of Coca Cola Company is $4,767 million.Other elements that could be affected by changing to cost methodbases of accounting include retained earnings which changes due tothe effect impacted on sales.

Question4

IfCoca-Cola Company is required to account for CCE as a passiveinvestment, the amount on the balance sheet is also affected and itwould change. This is because the investment In CCE will be limitedfor sales or purchases. CCE investment will be therefore accountedfor as long term. The amount to be shown in balance sheet underpassive investment will be $3,250 million. In this method, thedividends received from the investments are treated as revenue.However, in case where the company has plans to sell the stock or atleast make it available for sale then the fair value method ofaccounting is advised.

Question5

Uponconsolidation of CCE investment by Coca-Cola, the ROA (Return onAssets) is calculated by ROA= Net Income/Total Assets. Under thistreatment, ROA =.And the actual ROA before changing the accounting principle is givenby, ROA =.Returnon Assets is a measure of profitability on the assets invested in thefirm. This is a good indicator of how assets are utilized ingenerating profit for the firm. Oncarrying out the calculations, net income and the ending balance oftotal assets in two ratios and ignore the tax effects. Thus, thehigher the ROA number the better. Thus, the consolidated ROA ishigher than the actual ROA. The consolidated is 16.56% while theactual gives 14.64%. Hence for consolidated principle, theprofitability of the company tends to be higher.

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

“FORM10-K Annual Report.’’ TheCoca Cola Company.2013. SEC Filing. Web. 08thMarch. 2015. Retrieved fromhttps://www.google.com/url?sa=t&amprct=j&ampq=&ampesrc=s&ampsource=web&ampcd=1&ampcad=rja&ampuact=8&ampved=0CB0QFjAA&ampurl=http%3A%2F%2Fwww.coca-colacompany.com%2Finvestors%2F2005-annual-report-on-form-10-k&ampei=AaslVcq6Oobg7QaS84EI&ampusg=AFQjCNFkhbjDMP8URub7pxC9MBTd4LhCQg&ampsig2=j8yAwnPaZgT1tTPf9g4ZoA&ampbvm=bv.90237346,d.ZGU

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