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Founder Dave Thomas opened thefirst Wendy’s restaurant in 1969, which has grown to be the third largest

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.

~ Quantify the impact of possrble alternative accounting treatments on financial statements.

Refer to the 2012 financial statements and notes of The Wendy’s Company (“Wendy’s).

a. In general, why do companies enter into joint-venture agreements?

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

accounts for the difference between these two amounts?

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.

g. Consider the information in the statement of cash flows.

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

cash from operating activities.

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

in the revenue line of the income statement?

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-

venture investment, the equity method or the proportionate consolidation? Explain.

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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THE WENDY'S COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEME
(In Thousands Except Per Share Ari-Eng: OPERATIONS

Year Ended

December 30, January 1, January 2,


2012 2012 2011
Revenues: _ _ __

Ema,
ran se revenues
$2,198,323 $2,126,544 $2,079,081
306,919 304,814 296,358

2,505,242 2,431,358 2,375,439


Costs and expenses;

Costofsalcs 1,881,248 1,816,109 1,756,954

287,808 292,390 311,511

, 146,976 122,992 126,846

Imam“ °f1°n84chd assets 21,097 12,883 26,326

Other operating expense. net 4,335 v 4,152 3,357


. 41,031 45,711 —

M M 12—24314
Operating profit 122,747 137,121 150,445
Interest expense (98,604) (1 14,1 10) (118,385)

Loss on early extinguishment of debt (75,076) — (26,197)

Investment income, net 36,243 484 5,259

Other income, net 1,565 945 2,434

(Loss) income from continuing operations before income taxes


and noncontrolling interests (13,125) 24,440 13,556

Benefit from (provision for) income taxes w w) __4,_5_5_5

Income from continuing operations 7,958 17,912 18,1 11

Discontinued operations:

Income (loss) from discontinued operations, net of income taxes . . . . 1,951 762 (22,436)

Loss on disposal of discontinued operations, net of income taxes . . . . _ (442) (8,799) ——

Net income (loss) from discontinued operations 1,509 (8,037) (22,436)

Net income (loss) 9,467 9,875 (4,325)

Net income attributable to noncontrolling interests (2,384) _ _

Net income (loss) attributable to The Wendy’s

Company $ 7,083 $ 9,875 $ (4,325)

Basic and diluted income (loss) per share attributable to The Wendy’s

Company:
Continuing operations $ .02 $ .04 $ _04
Discontinued operations —

NC, income (loss) $ .02 s .02 s

Dividends per share $ ,10 $ .08 $ .07

See accompanying notes to consolidated financial statements.


THE WENDY’S COMPANY AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS


(In Thousands)

Dm-erbei-zf 30, Janina I,


ASSETS

Current assets:

Cash and cash equivalents $ 453,361 $ 475,231

Accounts and notes receivable 61,164 68,349

Inventories 13,805 12,903

Prepaid expenses and other current assets 24,231 27,397


Deferred income tax benefit 91 ,489 80,970

Advertising funds restricted assets 65,777 70,547


Total current assets 709,827 735,397

Properties 1,250,338 1,192,200


Goodwill 876,201 870,431

Other intangible assets 1,301,537 1,304,288

Investments 1 13,283 1 19,271

Deferred costs and other assets __5_2£3 £43

Total assets $4,303,199 $4,289,129

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:

Current portion of long—term debt $ 12,911 $ 6,597

Accounts payable 70,826 81,301

Accrued expenses and other current liabilities 137,348 178,298

Advertising funds restricted liabilities 65,777 70,547

Total current liabilities 286,862 336,743

Long—term debt 1,444,651 1,350,402


Deferred income taxes 438,217 458,107

Other liabilities 147,614 147,808

Commitments and contingencies

Stockholders’ equity:

Common stock, $0.10 par value; 1,500,000 shares authorized; 470,424 shares

issued 47,042 47,042

Additional paid-in capital 2,782,765 2,779,871

Accumulated deficit (467,007) (434,995

Common stock held in treasury, at cost (382,926) (395,947

Accumulated other comprehensive income 5,981 102

Total stockholders’ equity 1,985,855 1,996,065

Total liabilities and stockholders’ equity $4,303,199 $4,289,121

See accompanying notes to consolidated financial statements.


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THE WENDY'S COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS


(In Thousands)

Year Ended

December 30, january 1, January 2,


2012 2012 201 1
Cash flows from operating activities:

Net income (loss) : $ 9,467 $ 9,875 $ (4,325)

Adjustments to reconcile net income


operating activities:
Deprecration and amortization 154,174 145,302 182,172
L955 on eflrly extinguishment of debt 75,076 -— _‘
Distributions received from TimWen joint venture 15,274 14,942 13,980

Share—based compensation 1 1,473 17.688 13704


Impairment-of long—lived assets 21,097 14,441 69,477
Net IT§C0gnltlonl receipt of deferred vendor incentives (920) 7,070 (587)

Accretion of long—term debt 7,973 8,120 15,016


Amortization of deferred financing costs 4,241 6,216 11,779
Non-cash rent expense 7,210 7,554 9,334
Loss on disposal of Arby’s 442 8,799 —-

Equity in earnings in joint ventures, net (8,724) (9,465) (9:459)


Deferred income tax (31,598) 1,624 (29,779)

Operating investment adjustments, net (see below) (27,769) (145) (51201)


Other, net 3,093 2,999 8,264
Changes in operating assets and liabilities:
Accounts and notes receivable 3,999 (2,690) (4,730)
Inventories (561) (517) 394

Prepaid expenses and other current assets (1,360) (7,580) . 1,514


Accounts payable (9,266) 11,364 (15,795)

Accrued expenses and other current liabilities (42,906) 11,120 (29,508)

Net cash provided by operating activities 190,41 5 246,717 226,250

Cash flows from investing activities:

Capital expenditures (197,590) (146,763) (147,969)


Acquisitions (40,608) (11,210) (3,123)
Franchise loans, net 3,092 (4,003) —

Sale of Arby's, net —- 97,925 ——

Dispositions 21,023 6,960 5 ,660


Investment activities, net (see below) 27,949 (841) 32,158

Other, net (3,251) (265) _ 352

Net cash used in investing activities (189,385) (58,197) (1 12,922)

Cash flows from financing activities:


Proceeds from long-term debt 1,1 13,750 — 497,661

Repayments of long—term debt (1,044,310) (38,702) (474,791)


Deferred financing costs (15,566) (57) (16,353)
Premium payments on redemption/purchase of notes (43,151) _ __

Repurchascs of common stock — (157,556) (173,537)


Dividends (39,043) (32,366) (27,621)
Distribution to noncontrolling interests (3,667) _ _
Proceeds from stock option exercises 7,806 6,359 1,444

Other, net 52 (2,262) (953)

Net cash used in financing activities (24,129) (224,584) (194,150)

. - han es on

Net cash used in operations before effect of exchange rate c g

cash (23,099) (36,064) (80,822)


Effect of exchange rate changes on cash w &) &

Net decrease in cash and cash equivalents . . .. (21,870) (37,277) (79,211)

Cash and cash equivalents at beginning of period 475,231 512,508 591,719

Cash and cash equivalents at end of period “£61 @234 m

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THE WENDY'S COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(In Thousands Except Per Share Amounts)

(8) Investments

The following is a summary of the carrying value of our 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:

Arby’s 19,000 19,000


Jurlique —— 325
Other cost investments 4,913 8,127

$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.

Investment in joint Venture with Tim Horton: Inc.

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

adjustments from the Wendy’s merger.

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

Equity in earnings for the period 13,680 13,505 12,316


Amortization of purchase price adjustments (a) (3,129) _ (2,934) (2,857)

10,551 10,571 9,459


Distributions received (15,274) (14,942) (1 3,980)

Foreign currency translation adjustment included in “Other


comprehensive income (loss), net” 2,35 1 (2,51 3) 5,676

Balance at end of period (b) $ 89,370 $ 91,742 3 98,631

(a) Based upon an average original aggregate life of 21 years.

(b) Included in “Investments.”

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LgETIéVENDY's COMPANY AND SUBSIDIARIES


5 TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(In Thousands Except Per Share Amounts)

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:

Properties $73,013 $73,394


Cash and cash equivalents 3,538 2,621

Accounts receivable 3,274 4,231

Other 2,516 2:565

$82,341 $82,81_1_

Accounts payable and accrued liabilities . 55 3,21 5 $ 2,281

Other liabilities 8, 561 8,655

Partners’ equity 70,565 71,875

$82,341 $82,811

Year Ended

2% an .22
Income statement information:

Revenues $39,702 $39,374 $37,242

Income before income taxes and net income 27,377 27,358 24,247

Investment injoint Venture in japan

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

operating expense, net.”

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

Balance at beginning of period $ 77 fl _

Initial investment — 1,183

Equity in losses for the period (1,827) (1,106)


Balance at end of period (a) $0,750) $ 77

(a) Included in “Other liabilities” in 2012 and in “Investments” in 2011.

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THE WENDY'S COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(In Thousands Except Per Share Amounts)

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

December 30, 2012 and January 1, 2012.

Ya: End

3% 20;

Balance sheet information:

Current assets:

Cash SB 347 $ 686

Inventories 2 39

Prepaid expenses and other current assets 265 —281_

Total current assets 635 1,006

Properties I ,343 2,625


Deposits and other assets 703 £
Total assets $ 2,681 $4,124

Current liabilities:

Current portion of long-term debt $ 1,443 $ 414

Accounts payable 342 1,193

Accrued expenses and other current liabilities 92 76

Total current liabilities 1,877 1,683

Long—term debt 4,912 1,689


Other liabilities 614 526

Partners’ (deficit) equity (4,722) 226

Total liabilities and partners’ equity $ 2,681 $4,124

w“—
201 Z 201 1

Income statement information:

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'

owner, or otherwise assumed day-to-day control of the Japan JV’s operations. y J

Our obligations, including the funding of antici


pared. Hrture ‘cash requirements of the Japan IV
approximately $3,000, could total up to approximately $8,000 If our jornt venture partners are unable to P“for
their reimbursement and indemnity obligations to us.

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