Cultural Event
Coca-Cola mini-case
(Equity Method Investments)
The Coca-Cola Company (Coke) is the largest producer of bottled beverages in the world, yet it does not own its bottling companies. Coca-Cola Enterprises (CCE) bottles, distributes and markets the product it receives from Coke. It is owned 40% by Coke and the remainder by outside parties. Since Coke is a minority active investor in CCE, it accounts for this investment using the equity method.
Under the equity method, the investor records its net investment in the investee company, rather than grossing up the assets and liabilities. For example, if an investor company owns 40% of a company with assets of 1000, liabilities of 300 and equity of 700, it would report as an asset an investment in the amount of 280 (700*.4), rather than the investee company assets, liabilities and a minority interest account that would be customary with full consolidation. As a result, significant assets and liabilities are off-balance sheet. Furthermore, the investment account is increased by the investor’s proportionate share of investee company profits, less dividends received, and is not reported at fair market value as is the case for minority passive investments.
The purpose of this mini-case is to acquaint you with the financial statement effects of the equity method of accounting for intercorporate investments..
Attached is the balance sheet and income statement of Coke as of 1999. To give you a feel for the magnitude of this investment, please answer the following questions:
1. What are the total assets, liability and equity of CCE as of 1999?
2. What amount does Coke report as an asset relating to its investment in CCE?
3. How much profit does Coke report relating to its investment in CCE?
4. What other sources of revenue does Coke have relating to this investment?
5. Is this investment reported at cost or market? What is the...
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