This case involves the interpretation of Pepsi’s financial statements from the perspective of a financial analyst A substantial portion of Pepsi’s total assets consists of property, plant, and equipment. The following information is taken from Pepsi Co’s 2021 annual report.

All figures are in $ million.

Pepsi - Property, plant, and equipment
Note 14 — Supplemental Financial Information
Property, plant and equipment, net (e)	2021	2020
Land	1,123	1,171
Buildings and improvements	10,279	10,214
Machinery and equipment, including fleet and software	31,486	31,276
Construction in progress	3,940	3,679
	46,828	46,340
Accumulated depreciation	(24,421)	(24,971)
Total	22,407	21,369
Depreciation expense	2,484	2,335

Note 14. Property, plant, and equipment are recorded at historical cost. Depreciation is recognized on a straight-line basis over an asset’s estimated useful life. Construction in progress is not depreciated until ready for service. The land is not depreciated.

1. 1. Estimate the useful life of the company’s property, plant, and equipment for both years. State your assumptions.
   2. Briefly explain two factors that affect the reliability and accuracy of your estimates in part (a).
2. 3. In 2021, Pepsi reported a net income before tax of $9,069 million. In Pepsi’s annual report, the company stated that “Our beverage, food and snack products are in highly competitive categories and markets and compete against products of international beverage, food and snack companies that, like us, operate in multiple geographies, as well as regional, local and private label manufacturers, economy brands and other competitors. In many countries in which our products are sold, including the United States, The Coca-Cola Company is our primary beverage competitor. Other beverage, food and snack competitors include, but are not limited to, DPSG, Kellogg Company, The Kraft Heinz Company, Mondel z International, Inc., Monster Beverage, Nestlé S.A., Red Bull GmbH and Snyder’s-Lance, Inc.” Suppose the average useful life of Pepsi’s competitors is 10 years. Compute a revised estimate of Pepsi’s depreciation expense for year 2021 using the estimated useful life of Pepsi’s competitors. Use this amount to recalculate Pepsi’s net income before tax for the year ended 2021.
3. 4. Why might a financial analyst wish to make the adjustments in part (d)?
4. 5. Financial analysts generate various financial statement forecasts under several assumptions and scenarios. Consider these independent scenarios and ignore tax effects:-

(i) Suppose the company disposes of its entire net property, plant, and equipment for a cash consideration of $33,000 million on 1 January 2022. Outline the journal entry to recognize the disposal of net property, plant, and equipment. What is the effect of the disposal of the intangible assets on the income statement, statement of cash flow, and statement of financial position for the year ended 2022 (maximum 30 words)?

(ii) Suppose all the property, plant, and equipment were fully impaired on 1 January 2022. Outline the journal entry to recognize the disposal of net property, plant, and equipment. What is the effect of the impairment of the property, plant, and equipment on the income statement, statement of cash flow, and statement of financial position for the year ended 2022 (maximum 30 words)?

Answer rating: 100% (QA)

a Useful life of an asset in yrs Cost of the assetAnnual Depreciation expense Given that land is not ... View the full answer