Quiz 1: The Equity Method of Accounting for Investments

Business

Solution to Coca-Cola Company Analysis Case Coca-Cola lists the following companies as significant equity method investees: • Coca-Cola Hellenic Bottling Company S.A. ("Coca-Cola Hellenic"). • Coca-Cola FEMSA, S.A.B. de C.V. ("Coca-Cola FEMSA"). • Coca-Cola Amatil Limited ("Coca-Cola Amatil"). As part of strategic business alliances, each of these companies bottle, market, and distribute Coca-Cola's products in various designated geographic areas throughout the world, thus generating substantial revenues for the Coca-Cola Company. According to Coca-Cola's 2010 annual report (page 10), We make equity investments in selected bottling operations with the intention of maximizing the strength and efficiency of the Coca-Cola system's production, distribution and marketing capabilities around the world. These investments are intended to result in increases in unit case volume, net revenues and profits at the bottler level, which in turn generate increased concentrate sales for our Company's concentrate and syrup business. When this occurs, both we and our bottling partners benefit from long-term growth in volume, improved cash flows and increased shareowner value.

On 1 st January 2015 A Company has acquired 40% of the voting stock of PC Company for $700,000. The amortization expense for patent is $15,000 per year. The net income of PC Company for the year 2015 is $185,000 and it will increase by 10% in every year for four years. The amount of dividend paid for all the years is of $30,000. 1. The excel spreadsheet showing cost of investment in PC Company, percentage of shares acquired, first year of PC Company's reported income etc. is as under: img 2. The excel spreadsheet showing equity earnings in PC Company, investment in PC Company for the year 2015, 2016, 2017, 2018 and 2019 is as under: img 3. The average of the projected returns on beginning investment balance for five years is as under: img img img The excess of acquisition cost of 30% of the voting stock over book value will be attributed to customer list of $300,000 and remaining will be attributed to goodwill. img The amortization expense customer list over 5 years is as under: img During the year 2014 the QV Inc. has sold inventory to S Company for $160,000 having cost of $100,000 and at the end of the year 2014 the inventory having transfer price of $80,000 have remained unsold which has been sold in the year 2015. The gross profit rate for sale of inventory is calculated as under: img The unrealized gross profit on unsold inventory at the end of the year 2014 is as under: img The proportionate unrealized gross profit related to QV Inc. is as under: img During the year 2015 the QV Inc. has sold inventory to S Company for $175,000 having cost of $140,000 and at the end of the year 2015 the inventory having transfer price of $40,000 have remained unsold which has been sold in the year 2016. The gross profit rate for sale of inventory is calculated as under: img The unrealized gross profit on unsold inventory at the end of the year 2015 is as under: img The proportionate unrealized gross profit related to QV Inc. is as under: img The computation of equity income from QV Inc. for the year 2014 and 2015 is as under: Equity Income in QV Inc. for the year 2014 img Equity Income in QV Inc. for the year 2014 img The equity income in QV Inc. for the year 2014 and 2015 is of the amount $61,500 and $27,900.

When an investor uses the equity method to account for investments in common stock, cash dividends received by the investor from the investee should be recorded as a deduction from the investment account.. Hence, the option ( D) is correct. The other option does not match the above criteria.