Question

This is an excerpt from your book. I think that it is a good representation of application of the topics of the chapter.

Please write a few sentences addressing the marketing student in your group. Explain to him/her the applicable concepts that will quell the frustration.

Please read:

You are the lone accounting major in your five-member group in your Business Policy class. A part of the case your group is working on is the analysis of the financial statements of the Coca-Cola Company.

The marketing major in the group is confused by the following disclosure note from Coca-Cola's 2013 annual report:

NOTE 3: INVESTMENTS (in part)

Investments in debt and marketable securities, other than investments accounted for under the equity method, are classified as trading, available-for-sale or held-to-maturity. Our marketable equity investments are classified as either trading or available-for-sale with their cost basis determined by the specific identification method. Our investments in debt securities are carried at either amortized cost or fair value. Investments in debt securities that the Company has the positive intent and ability to hold to maturity are carried at amortized cost and classified as held-to-maturity. Investments in debt securities that are not classified as held-to-maturity are carried at fair value and classified as either trading or available-for-sale. Realized and unrealized gains and losses on trading securities and realized gains and losses on available-for-sale securities are included in net income. Unrealized gains and losses, net of deferred taxes, on available-for-sale securities are included in our consolidated balance sheets as a component of AOCI, except for the change in fair value attributable to the currency risk being hedged.

“They say unrealized gains and losses on available-for-sale securities are reported as part of AOCI. What's that? I don't see these gains and losses on the income statement,” he complained. “And held-to-maturity securities—why are they treated differently? And what about equity method investments? On the balance sheet they have over $10 billion of investments accounted for under the equity method. They made over $600 million on those investments in 2013! Is that cash they can use?”

Answer 1

Hey there !!

Let me help you with this case study..

First let us condense the data given in a simplified manner after which we can address the questions asked by the marketing team member as per the case study.

1	Investments in debt and marketable securities, other than investments accounted for under the equity method, are classified as trading, available-for-sale or held-to-maturity
2	Marketable equity investments are classified as either trading or available-for-sale with their cost basis determined by the specific identification method
3	Investments in debt securities are carried at either amortized cost or fair value
4	Investments in debt securities that the Company has the positive intent and ability to hold to maturity are carried at amortized cost and classified as held-to-maturity
5	Investments in debt securities that are not classified as held-to-maturity are carried at fair value and classified as either trading or available-for-sale.
6	Realized and unrealized gains and losses on trading securities and realized gains and losses on available-for-sale securities are included in net income.
7	Unrealized gains and losses, net of deferred taxes, on available-for-sale securities are included in our consolidated balance sheets as a component of AOCI, except for the change in fair value attributable to the currency risk being hedged.

Now let us answer to the questions asked in the case study one by one..

Q1.	Unrealized gains and losses on available-for-sale securities are reported as part of AOCI. What's that? I don't see these gains and losses on the income statement,” he complained
Ans	Unrealized gains and losses on available-for-sale securities are reported as part of AOCI. AOCI is Accumulated and Other Comprehensive Income Account. Any resulting gain or loss from Change in the Fair value of these investments is recorded in unrealized gain and loss account and this account is then reported as a separate line item in the stockholders' equity section of the balance sheet.
	The gains and losses for available‐for‐sale securities are not reported in the income statement until the securities are sold. This is the reason why these gains and losses are reported in AOCI Account.
Q2.	“And held-to-maturity securities—why are they treated differently?
Ans	First understand what Held to maturity securities are. These securities are purchased with an intention to hold till maturity.
	Such investments are measured at the amortised cost basis in the balance sheet.
	However the interest income is recored in the Income statement.
	They are accounted differently because temporary price changes are not recorded for in these investments since they are held with purpose of Maturity.
Q3.	what about equity method investments?
Ans	As per this method, profits earned by a firm's investments in other companies is assessed.
	The income earned is reported in the income statement and the Investment value in the balance sheet is recored as per the basis of firm's share in that company's assets.
	When one company has made a significant investment in the other, equity method comes into picture the. By significant investment we mean, 20% or more.
Q4.	On the balance sheet they have over $10 billion of investments accounted for under the equity method. They made over $600 million on those investments in 2013! Is that cash they can use?”
Ans	No, the same can not be used as it is not the Cash profit.

I hope the above solution is clear to you now...do let m know in case of any concerns...All the best !!!!