Question

Consequences of Investment Reporting Choices Assume The Coca-Cola Company acquires all of the stock of Bubbly Bottler on January 1, 2019, at a cost of $950 million in cash. Bubbly's balance sheet on that date is as follows (in millions): 100 Tangible assets $1,000 Liabilities $ 900 Equity Total assets $1,000 Total liabilities and equity $1,000 Bubbly's tangible assets and liabilities are reported at amounts approximating fair value, and the excess paid over book value is attributed entirely to goodwill. Required a. Assume that Coca-Cola reports its investment in Bubbly as a significant influence investment, because although it owns all of Bubbly's stock, the decision-making structure at Bubbly does not allow Coca-Cola to control Bubbly. How does Coca- Cola record the investment at January 1, 2019? Enter answers in millions. Description Credit Investment in Bubbly Debit OX Cash OX OX b. Now assume that Coca-Cola controls Bubbly and reports the acquisition as a merger. How does Coca-Cola record the investment at January 1, 2019? Enter answers in millions. Description Debit Credit Tangible assets Goodwill OX Ox C. Assume Coca-Cola's balance sheet just prior to the acquisition consists of $80,000 million in assets and $20,000 million in liabilities. Calculate Coca-Cola's leverage, measured as total liabilities divided by total assets, if Coca-Cola reports its investment in Bubbly as a significant influence investment and as a merger. Round answers to one decimal place, when appropriate (ex: 0.2345 = 23.5%). Leverage Significant influence 3.21 % x Merger 3.21 % X Liabilities Cash

Answer 1

a. Description Investment in Bubbly To Cash Debit ($) Credit ($) 950 950 b. Debit ($) Credit ($) 1000 Description Tangible Assets Goodwill To Liabilities To Cash 850 900 950 c. 25 Significant Influence Merger 25.83%

Significant Influence = Total Liabilities/Pre acqusition assets + Investment in bubbly - Cash Total Assets = 80000+950-950 $80000 Total Liability = $20000 Leverage = 20000/80000 25% Merger Total Assets = 80000+1000+850-950 80900 Total Liability = 20000+900 20900 Leverage = 20900/80900 25.83%