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hamburger fast fwd IjeSIaurant company in the world, with operations in 26 different countries. Wendy ’5 and Tim
HOV T0713 Inc. entered m a 50-50joint venture in a Canadian restaurant real estate joint venture ( “T im Wen "). Whit!h
owns and ope” ates 105 Wendy 'S/T im Hortons combo restaurants in Canada. (Source: Company 2012 Form IO'K)
..
(.3 Objectives . ,
gndérstand why companies undertake. j chit ventures and other strategic investments.
0
.-Understand the accounting f0? equity method investments.
._ . Use financialstatements and footnotes to analyze joint—venture activity and disclosures.
Refer to the 2012 financial statements and notes of The Wendy’s Company (“Wendy’s).
b. Consistent with US. GAAP, Wendy’s uses the equity method to account for its joint venture in
TimWen. Briefly explain this accounting method. In your answer, be sure to comment on how the
investing company accounts for its initial investment and any subsequent income and dividend
activity of its investee.
c. When a company purchases shares (ownership) in another company, the investment amount may
exceed their share of the book value of the underlying net assets of the investee. How does the
investing company account for this excess amount under the equity method?
’ Process
(1. Consider the information in Note 8. What amount did Wendy’s include on its 2012 and 2011 balance
sheets for their equity method investments? Where does this appear on Wendy’s consolidated balance
sheet?
e. Using information in Note 8, compare the amount recorded for Wendy’s investment in TimWen at
December 30, 2012 with Wendy’s 50% share of TimWen’s equity at December 30, 2012. What
f. Consider the information disclosed in Note 8 regarding Wendy’s investment in the TimWen Joint
Venture.
i. How did Wendy’s equity method investment in TimWen affect their earnings before taxes in
2012 and 201 1? Where does this appear in Wendy’s consolidated statements of operations?
ii. Prepare the journal entry to record Wendy’s share of TimWen’s 2012 earnings.
iii. What is the amount of the amortization of the purchase price adjustments in 2012? Prepare the
journal entry to record the amortization of the purchase price adjustments for 2012.
iv. What amount of dividends did Wendy’s receive from the TimWen joint venture in 2012 and
201 1? Prepare the journal entry to record the receipt of d1v1dends’from TimWen for 2012.
i. The operating activities section of the statement of cash flows reports a negative adjustment for
“Equity in earnings in joint ventures, net Of $8,724 m 2012. Reconcile this amount to the
information disclosed in NOIC (S. nxpiain wny a negative my uouuvul. is mum, to 'cuuve at net
ii. The operating section also reports a positive adjustment for “Distributions received .hom jOim
venture” of $15,274 in 2012. Reconcile this amount to the information disclosed in Note 8.
Explain why a positive adjustment is made to arrive at net cash from operating actiVities.
<> . ' Analysis ' <>
Some argue that the equity method of accounting is a form of off—balance sheet financing because the
liabilities of the investee of not included with the liabilities of the investor, but are netted With the
investee’s assets.
i. Determine the amount of off-balance sheet debt associated with. the TimWen joint venture on
Wendy’s 2012 financial statements. Hint: To conduct the analySis, you’ll use the balance sheet
information for TimWen that is disclosed in Note 8.
ii. Are you concerned about off-balance sheet financing related to the TimWen joint venture? Why
or Why not?
The equity method of accounting also does not allow the investor to include their share of the
investee’s revenues along with other revenues reported in the income statement. By what percentage
would Wendy’s 2012 reported revenues increase if it were to include its share of TimWen’s revenues
Both US. GAAP and IFRS require companies to use the equity method of accounting for joint
ventures. However, until 2011, IFRS allowed for an alternative accounting method called
“proportionate consolidation.” Under the proportionate consolidation method, the investor includes
in its financial statements its share of the joint-venture assets, liabilities, revenue, and expenses rather
than the net amounts on the balance sheet and income statement.
In your opinion, which accounting treatment better reflects the economic reality of Wendy’s joint-
If Wendy’s accounted for its investment in TimWen using the proportionate consolidation method, by
what percentage would their 2012 net income and total stockholder’s equity increase?
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CONSOLIDATED STATEME
(In Thousands Except Per Share Ari-Eng: OPERATIONS
Year Ended
Ema,
ran se revenues
$2,198,323 $2,126,544 $2,079,081
306,919 304,814 296,358
M M 12—24314
Operating profit 122,747 137,121 150,445
Interest expense (98,604) (1 14,1 10) (118,385)
Discontinued operations:
Income (loss) from discontinued operations, net of income taxes . . . . 1,951 762 (22,436)
Basic and diluted income (loss) per share attributable to The Wendy’s
Company:
Continuing operations $ .02 $ .04 $ _04
Discontinued operations —
Current assets:
Current liabilities:
Stockholders’ equity:
Common stock, $0.10 par value; 1,500,000 shares authorized; 470,424 shares
Year Ended
. - han es on
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qw-
(8) Investments
Year End
2012 2011
Equity investments:
:5 89,370 $ 91,742
Joint venture with THI
Joint venture in Japan (a) (1,750) 77
Cost investments:
$111,533 $119,271
(a) In 2012, our equity investment in the Japan JV was included in “Other liabilities" Wendy’s has provided certain
guarantees and the partners have agreed on a plan to finance anticipated Future cash requirements of the Japan JV
as further described below.
Wendy’s is a partner in TimWen and our 50% share of the joint venture is accounted for using the equity
method of accounting. Our equity in earnings from TimWen is included in “Other operating expense, net.” The
carrying value of our investment in TimWen exceeded our interest in the underlying equity of the joint venture by
$54,088 and $55,805 as of December 30, 2012 and January I, 2012, respectively, primarily due to purchase price
Presented below is activity related to our portion of TimWen included in our consolidated balance sheets and
consolidated statements of operations as of and for the years ended December 30, 2012, January 1, 2012 and
January 2, 201 1.
Year Ended
y £1 E
Balance at beginning of period $ 91,742 $ 98,631 $ 97,476
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431-
Presented below is a summary of the financial information of TimWen, including the balance sheets as of
December 30’ 2012 and January 1, 2012 and certain income statement information for the years ended
December 30, 2012, January 1. 2012 and January 2, 2011. The summary balance sheet financial information does
“0‘ d‘St'nngh between current and long-term assets and liabilities.
Year End
222 £1
Balance sheet information:
$82,341 $82,81_1_
$82,341 $82,811
Year Ended
2% an .22
Income statement information:
Income before income taxes and net income 27,377 27,358 24,247
During the second quarter of 2011, Wendy’s entered into the Japan JV. Wendy’s 49% share of the joint
venture is accounted for using the equity method of accounting and our equity in losses is included in “Other
Presented below is activity related to our portion of the Japan JV included in our consolidated balance sheets
and consolidated stateinents of operations as of and for the years ended December 30, 2012 and January 1, 2012.
Year Ended
& ELI
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THE WENDY'S COMPANY AND SUBSIDIARIES
Presented below is a summary of the financial information of the Japan JV, including the balance sheets as of
December 30, 2012 and January 1, 2012, and certain income statement Information for the years ended
Ya: End
3% 20;
Current assets:
Inventories 2 39
Current liabilities:
w“—
201 Z 201 1
Revenues $ 2,322 $ 69
(5,322) (2,293)
In 2012, Wendy’s provided a guarantee to certain lenders to the Japan JV for which our joint ventuI
partners have agreed, should It become necessary, to reimburse and otherwise indemnify us for their 51% share of th
guarantee and (2) agreed to reimburse and otherwise indemnify our joint venture partners for our 49% share of th
guarantee by our joint venture partners of a line of credit granted by a different lender to the Japan JV to fun
working capital requirements. As of December 30, 2012, our portion of these contingent obligations totalc
approximately $3,000 based upon then current rates of exchange. The fair value of out guarantees is immaterial.
In early 2013,-the joint venture partners agreed on a plan to finance anticipated future cash requirements of ti
Japan JV. As determined by the amount of future capital contributions by each of the partners Wendy’s may beoorr
the majority OWIlCl' Of the Japan IV. The Japan JV and the effect of the noncontrolling interest in the Japan JV wool
then be included in the Wendy’s consolidated financial statements from the date that Wend ’s became the ma'ori'
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