Question

The Coca-Cola Company and PepsiCo, Inc. The financial statements of Coca-Cola and PepsiCo are presented in Appendices C and D, respectively. The companies' complete annual reports, including the notes to the financial statements, are available online. Instructions Use the companies' financial information to answer the following questions.

(a) What type of income format(s) is used by these two companies? Identify any differences in income statement format between these two companies.

(b) What are the gross profits, operating profits, net incomes, and net incomes attributable to noncontrolling interests for these two companies over the 3-year period 2012-2014? Which company has had better financial results over this period of time?

(c) What income statement format do these two companies use to report comprehensive income?

CA-4-2,p.190 Instructions Indicate the deficiencies in the income statement presented above. Assume that the corporation desires a single-step income statement. CA4-2 GROUPWORK (Earnings Management) Bobek Inc. has recently reported steadily increasing income. The company reported income of $20,000 in 2014, $25,000 in 2015, and $30,000 in 2016. A number of market analysts have recommended that investors buy the stock because they expect the steady growth in income to continue. Bobek is approaching the end of its fiscal year in 2017, and it again appears to be a good year. However, it has not yet recorded warranty expense. Based on prior experience, this year's warranty expense should be around $5,000, but some managers have approached the controller to suggest a larger, more conservative warranty expense should be recorded this year. Income before warranty expense is $43,000. Specifically, by recording a $7,000 warranty accrual this year, Bobek could report an increase in income for this year and still be in a position to cover its warranty costs in future years. Instructions

(a) What is earnings management?

(b) Assume income before warranty expense is $43,000 for both 2017 and 2018 and that total warranty expense over the 2-year period is $10,000. What is the effect of the proposed accounting in 2017? In 2018?

(c) What is the appropriate accounting in this situation?

P18-2 (LO2,3,4) (Allocate Transaction Price, Modification of Contract) Refer to the Tablet Bundle A revenue arrangement in P18-1. In response to competitive pressure for Internet access for Tablet Bundle A, after 2 years of the 3-year contract, Tablet Tailors offers a modified contract and extension incentive. The extended contract services are similar to those provided in the first 2 years of the contract. Signing the extension and paying $90 (which equals the standalone selling of the revised Internet service package) extends access for 2 more years of Internet connection. Forty Tablet Bundle A customers sign up for this offer. Instructions

(a) Prepare the journal entries when the contract is signed on January 2, 2019, for the 40 extended contracts. Assume the modification does not result in a separate performance obligation. (b) Prepare the journal entries on December 31, 2019, for the 40 extended contracts (the first year of the revised 3-year contract).

P18-3 (LO2,3,4) (Allocate Transaction Price, Discounts, Time Value) Grill Master Company sells total outdoor grilling solutions, providing gas and charcoal grills, accessories, and installation services for custom patio grilling stations. Instructions Respond to the requirements related to the following independent revenue arrangements for Grill Master products and services.

(a) Grill Master offers contract GM205, which is comprised of a free-standing gas grill for small patio use plus installation to a customer's gas line for a total price $800. On a standalone basis, the grill sells for $700 (cost $425), and Grill Master estimates that the standalone selling price of the installation service (based on cost-plus estimation) is $150. (The selling of the grill and the installation services should be considered two performance obligations.) Grill Master signed 10 GM205 contracts on April 20, 2017, and customers paid the contract price in cash. The grills were delivered and installed on May 15, 2017. Prepare journal entries for Grill Master for GM205 in April and May 2017.

(b) The State of Kentucky is planning major renovations in its parks during 2017 and enters into a contract with Grill Master to purchase 400 durable, easy maintenance, standard charcoal grills during 2017. The grills are priced at $200 each (with a cost of $160 each), and Grill Master provides a 6% volume discount if Kentucky purchases at least 300 grills during 2017. On April 17, 2017, Grill Master delivered and received payment for 280 grills. Based on prior experience with the State of Kentucky renovation projects, the delivery of this many grills makes it certain that Kentucky will meet the discount threshold. Prepare the journal entries for Grill Master for grills sold on April 17, 2017. Assume the company records sales transaction net.

(c) Grill Master sells its specialty combination gas/wood-fired grills to local restaurants. Each grill is sold for $1,000 (cost $550) on credit with terms 3/30, net/90. Prepare the journal entries for the sale of 20 grills on September 1, 2017, and upon payment, assuming the customer paid on (1) September 25, 2017, and (2) October 15, 2017. Assume the company records sales net.

(d) On October 1, 2017, Grill Master sold one of its super deluxe combination gas/charcoal grills to a local builder. The builder plans to install it in one of its "Parade of Homes" houses. Grill Master accepted a 3-year, zero-interest-bearing note with face amount of $5,324. The grill has an inventory cost of $2,700. An interest rate of 10% is an appropriate market rate of interest for this customer. Prepare the journal entries on October 1, 2017, and December 31, 2017.

Answer 1

For the first of the question is answered using the 2014 annual report for Coca-Cola and Pepsi .

A. Both companies used multi-step Income statement which is classified by function (salaries, depreciation etc is split between cost of sales, selling administrative, general etc). A multi step Income statement shows detail subtraction of items to reach Net income as in the case of these 2 companies

The only diffrence in the format of the income statement for the 2 companies is with respect to classification. For example Pepsi co clubs Interest and other income while Coco-cola shows them seperately

2. Pepsico

(USDm)	2012	2013	2014
Gross profit	34,201	35,172	35,799
Operating profit	9,112	9,705	9,581
Net Income (total)	6,214	6,787	6,558
Net Income to Minority	36	47	45

Coca-cola

(USDm) 2012 2013 2014 Gross profit 28,964 28,433 28,109 Operating profit 10,779 10,228 9,708 Net Income (total) 9,086 8,626 7,124 Net Income to Minority 67 42 26

Though the margins are much higher for Coco cola than Pepsico, there has been a decline in opearying and net income margins for Coco cola. But for pepsico, margins are stable or have increased. We can say that Pepsico has had better resukts over the years (opearting profit margin declines for Coca Cola from 37% to 21% from 2012-2014, it is stable at 14% for Pepsico. NI marginsreduces for Coca Cola from 19 to 15% during the period while it increased from 9% in 2012 to 10% in 2014 for Pepsico.

3. Both companies show a statement of other comprehensive income that includes items that impacts equity but is not included in Income statment: unrealised Forex losses, loss/income on available for sale securities, Pension remeasurement and reclassificationand derivative income/losses. Pepsico shows all items in detail while Coca cola gives a comprehensive idea of the items.

Based on the income statement on CA-4-2,p.190 the following is answered.

O'MALLEY CORPORATION
Single-Step INCOME STATEMENT
Revenues & Gains
Sales revenue		850000
Dividends		32,300
Gain on recovery of insurance proceeds from earthquake loss		38,500
Total Revenues &gains		920,800
Expenses & losses
Cost of goods sold	510,000
Selling expenses	101100
Administrative expense	73,400
Advertising expense	13,700
Loss on obsolescence of inventories	34,000
Total Expenses & losses		732,200
Income from continuing operations		188,600
Loss on discontinued operations		48,600
Income before income tax		140,000
Income tax		56,000
Net income		84000

a.Earnings management is deliberately managing higher earnings for a variety of reasons such as for maintaining the company's prestige & previous record in the eyes of the investing public so as to maintain/push up   the stock prices , or for purposes of higher incentives & bonus to managers that increase based on the increased profits.

Effect of the proposed accounting in 2017

Debit   Warranty Expense      7000                       (decreases income by 7000-ie. 36000)

Credit   Warranty Liability                     7000        (Increases current laibility by 7000 )

Effect of the proposed accounting in 2018

Debit   Warranty Expense      3000                       (decreases income by 3000-ie. 40000)

Credit   Warranty Liability                     3000        (Increases current laibility by 3000 )

c. Appropriate accounting will be:

In both 2017 & 2018

Debit   Warranty Expense      5000                       (decreases income by 5000-ie. 38000)

Credit   Warranty Liability                     5000        (Increases current laibility by 5000 ) P18-2 (LO2,3,4) a. Date Particulars Debit Credit 2-Jan-19 Cash 3600 Uneraned Service Revenue 3600 Explanation: 3600 = 40*90 Please note that services in the extended period are the same as the services that were provided in the original contract period. As they are not distinct hence the modifications will be considered as part of the original contract. b. Date Particulars Debit Credit 31-Dec-19 Uneraned Service Revenue 2413 Service revenue 2413 Explanation: Original internet service contract = 40*273 = 10,290 Revenue recognized in 1st two years = 10290*2/3 = 7280 Remianining service at orignal rates = 10290-7280 = 3640 Extended service = 3600 3640+3600 = $7240 7240/3 = $2413 P18-3 (LO2,3,4) (a) Journal entries for Grill Master for GM205 in April and May 2017. Date Account title Debit Credit April 20 Cash ($800*10) Unearned Revenue($658.80*10) Unearned Revenue-Installation($141.20*10) (To record unearned sales revenue and unearned installation revenue) 8,000 6,588 1,412 May 15 Unearned Revenue Unearned Rev-installation Sales Revenue Sales revenue- Installation (To recognize sales and installation revenue) 6,588 1,412 6,588 1,412 May 15 Cost of goods sold ($425*10) Inventory (To record cost of goods sold) 4,250 4,250 Explanation: Standalone price Proportion Price paid Allocation Grill $700 82.35% $800 $658.80 installation service $150 17.65% $141.20 $850 100% $800 (b) Journal entries for Grill Master forGM205 in April 17 2017. Date Account title Debit Credit April 17 Cash ($800*10) Accounts Receivable 52,640 52,640 April 17 Unearned Revenue Revenue- Grill 52,640 52,640 Explanation: Calculation Amount Base price 400*$200 = $80,000 6% discount $80,000*6%= ($4,800) Net price $75,200 For 400 units Price for 1 unit $75,200 / 400 $188 Paid for 200 Units 280*$188 $52,640 (c)1.September 25, 2017: Date Account title Debit Credit Sep 1 Accounts Receivable [20 grills*$1,000 – 3%] Sales Revenue 19,400 19,400 Sep 1 Cost of Goods Sold (20 grills*$550) Inventory 11,000 11,000 Sep 25 Cash Accounts Receivable 19,400 19,400 2. October 15, 2017: Date Account title Debit Credit Sep 1 Accounts Receivable [20 grills*$1,000 – 3%] Sales Revenue 19,400 19,400 Sep 1 Cost of Goods Sold (20 grills*$550) Inventory 11,000 11,000 Oct 15 Cash Accounts Receivable 640Sales Discounts Forfeited(3% X $20,000) 20,000 20,000 600 (d) Date Account title Debit Credit Oct 1 Cost of Goods sold Inventory (To record cost of goods sold) 2,700 2,700 Oct 1 Accounts Receivable Sales Revenue 5,324 5,324 Dec 31 Cash Interest expense Notes Receivable Interest Revenue (To record revenue earned) 5,856.40 532.40 5,856.40 532.40