In 1986, The Coca-Cola Company borrowed $2.4 billion to purchase several large soft drink bottling operations. Then a separate company, Coca-Cola Enterprises, was formed to bottle and distribute Coke throughout the country. The Coca-Cola Company sold 51% of Coca-Cola Enterprises to the public and retained a 49% ownership. The $2.4 billion debt incurred to finance the purchase was transferred to the balance sheet of Coca-Cola Enterprises.
While 49% ownership does not guarantee control, it does give The Coca-Cola Company significant influence over the bottling company. For example, The Coca- Cola Company determines the price at which it will sell concentrate to Coca-Cola Enterprises and reviews Coca-Cola Enterprises’ marketing plan. In addition, The Coca-Cola Company’s chief operating officer is chairman of Coca-Cola Enterprises, and six other current or former Coca-Cola Company officials are serving on Coca-Cola Enterprises’ board of directors.
1. From an accounting standpoint, what is the significance of owning more than 50% of a company’s stock?
2. Why would The Coca-Cola Company elect to own less than 50% of its distribution network?
3. In the consolidation process, the parent’s and the subsidiary’s individual asset and liability account balances are added together and reported on the consolidated financial statements, whereas with the equity method, the net investment is reported as an asset on the investor company’s balance sheet. Why would The Coca-Cola Company want to avoid consolidation?