Question

You are the chief accountant of BottlingCo, a bottling plant that manufactures glass bottles and sells them to beverage companies. During the current year of 2018 BottlingCo purchases a significant number of shares of The Coca-Cola company. Since Bottling is a major bottling supplier of Coca-Cola, its intention of investing in Coca-Cola is not for the purposes of gaining more control, improve affiliation, or achieving other continuing business advantage. At year-end of 2018, the CEO of BottlingCo asks you to report the Coca-Cola shares as part of the current assets in the balance sheet because they are immediately convertible into cash. Would this be in line with GAAP?

Answer 1

As a chief accountant of Bottling Co. if the CEO asks me to report the Coca-Cola shares as part of the current assets in the balance sheet because they are immediately convertible into cash then this means that he is willing to liquidate the shares within one year as this is in line with GAAP as well. I will explain him the concept of Marketable Equity Securities.

Marketable equity securities can be either common stock or preferred stock.

They are equity securities of a company held by another corporation, and are listed in the balance sheet of the holding company.

If the stock is expected to be liquidated or traded within one year, the holding company will list it as a current asset. Conversely, if the company expects to hold the stock for longer than one year, it will list the equity as a non-current asset. All marketable equity securities, both current and non-current, are listed at the lower value of cost or market.

If, however, a company invests in another company's equity in order to acquire or control that company, the securities aren't considered marketable equity securities. The company instead lists them as a long-term investment on its balance sheet.

Since it is clearly mentioned here that Bottling Co.'s  intention of investing in Coca-Cola is not for the purposes of gaining more control, improve affiliation, or achieving other continuing business advantage. Therefore this investment can be considered as a current assets.