On January 1, Intergen, Inc., invests $200,000 for a 40% interest in Ryan, a new joint venture with two other partners, each investing $150,000 for 30% interest. Intergen plans to sell all of its production to Ryan which will resell the inventory to retail outlets. Intergen plans to sell all of its production to Ryan, which will resell the inventory to retail outlets. The equity partners agree that Ryan will buy inventory only from Intergen. Also, Intergen plans to use the equity method for financial reporting.

During the year, Intergen expects to incur costs of $850,000 to produce goods with a final retail market value of $1,200,000. Ryan projects that, during the year, it will resell three-fourths of these goods for $900,000. It should sell the remainder in the following year.

The equity partners plan a meeting to set the price Intergen will charge Ryan for its production. One partner suggests a transfer price of $1,025,000 but is unsure whether it will result in an equitable return across the equity holders. Importantly, Intergen agrees that its total rate of return (including its own operations and its investment in Ryan) should be equal to that of the other investors’ return on their investments in Ryan. All agree that Intergen’s value including its investment in Ryan is $1,000,000.

1.

Create an Excel spreadsheet analysis showing the following: Projected income statements for Intergen and Ryan. Formulate the statements to do the following: Link Ryan's cost of goods sold to Intergen's sales (use a starting value of $1,025,000 for Intergen's sales). Link Intergen's equity in Ryan's earnings to Ryan's net income (adjusted for Intergen's gross profit rate × Ryan's ending inventory × 40 percent ownership percentage). Be able to change Intergen's sales and see the effects throughout the income statements of Ryan and Intergen. Note that the cost of goods sold for Intergen is fixed. The rate of return for the two 30% equity partners on their investment in Ryan. The total rate of return for Intergen based on its $1,000,000 value.

2.

What transfer price will provide an equal rate of return for each of the investors in the first year of operation? (Hint: Under Excel's Tools menu, use the Goal Seek or Solver capability to produce a zero difference in rates of return across the equity partners by changing the cell that contains Intergen's sales.) Be sure to show all work! I would like to see the new income statements at the income that will cause the total rate of return for Intergen and the equity partners to match.

• As this is a 400-level class, I have high expectations in regards to the organization, content, and appearance of the Excel workbook. It should be well organized, professional in appearance, and easy to read. Plan to use necessary headers, footers, font changes, formulas, and other organizational and display aids that will make this Excel spreadsheet look like a professional document that you would be willing to submit to your supervisor at a new job. I have left the instructions fairly vague in regards to specific display and organizational requirements so that you can use the tools that you have at your disposal to make this document as professional and visually appealing as possible.

Part II: Wendy’s Analysis Case

Formatting Requirements:

1. The entire paper should be typed ….including exhibits.

2. COVER PAGE - Case Name, Date, Your Name, Class, and Instructor’s Name

3. Table of Contents (including exhibits for necessary calculations and reconciliations)

4. Separate paper into sections (i.e.: Intro., Concepts, Processes, etc.)

• Section headings capitalized and bolded and/or underlined

5. Exhibits at end of paper:

a) Each exhibit on a separate page.

b) Single line equations should be included as footnotes

c) Summarize all exhibits in the text of the paper and refer to all exhibits. Use the format (exhibit X) not (see exhibit X)

d) Any chart/graph/table greater than one-third of a page should be an exhibit.

e) Do not put complex calculations in the body of the paper. Put them as a footnote or as an exhibit. Be sure to provide evidential calculations to support all figures calculated in Part B and C for this assignment.

6. Number all pages (including exhibits) starting AFTER the table of contents

7. Exhibits should be identified in the upper right-hand corner and underlined (i.e.: Exhibit A). Every exhibit should have a title which should be bolded and/or underlined.

8. Use only whole dollars (no cents) unless the situation specifically calls for it.

• Use the following format for small numbers: “seven percent (7%)” or “fifteen (15) years.”

9. Effective communication is considered one of the most important skills required for accounting and business professionals. It is essential that all students in this course are able to communicate their thoughts, opinions, and calculations in a written format. It is expected that all written assignments in this course will be developed in a professional manner. Students are expected to follow standard writing conventions used in business, including:

• Paragraphs
• Complete sentences
• No run on sentences or fragments
• Well-structured, coherent sentences
• Correct use of punctuation
• Correct spelling
• Write in the third person. Avoid using slang.

10. While I expect a through and accurate analysis, a significant part of the grade will be determined by your writing and the organization of your paper as a professional document.

11. Whenever you are using thoughts and ideas that are not your own, you will need to cite them in your work. This ensures that you are supporting your thoughts with facts.

When you do cite the textbook or other approved resources, please make sure that you are citing your work. If you quote the book word for word you must use in-text citations (no assignment will be accepted that contains more than 20% direct quotes). Please see the example:

“Effective cash management requires that you carefully evaluate your alternatives and select the services and service providers that best meet your needs. You have many providers and services to choose from, and they vary widely in interest paid, fees, safety, and customer service (Bajtelsmit and Rasrelli, 2008. p. 80).”

Then you will need to add the citation at the end of your post “References Page” for written assignments, for example:

Bajtelsmit, V. L. & Rastelli, L. G. (2008). Personal finance: Managing your money and building wealth. Hoboken, NJ: Wiley.

A word of caution, quotes quickly can become a crutch, I want to hear your thoughts and ideas, not the thoughts from an outside party. For that reason, quotes should not make up more than 20% of the written portion of this problem set.

If you paraphrase the textbook, you will still need to create a citation and give credit to the authors. Failure to properly cite information can result in lost points in assignments or even be considered plagiarism.

12. Sources are very important to use in your coursework. Use credible sources to support your assignments, which provide verifiable information. Some sources are not acceptable in this class. The most egregious source is Wikipedia. It is never allowed under any circumstances. Wikipedia is a free-edit on-line publication, which means that anyone can edit any article in the publication. This alone makes this publication wholly unreliable as an authoritative source.

Other sources which are never permissible to use in a college-level academic paper include the following:

• Wiki sites
• Encyclopedias
• Blogs
• Unverifiable information
• Web sites that exist primarily to sell any product and purport to also include research about products sold on the site or products that compete with the product being sold on the site
• The Bible, The Qu’ran or other Holy Books (unless you are in a comparative religion class)
• Any site that invites you to become an author or editor, or to share your 'expertise' in some way
• Any site that provides the opportunity to use another person’s work as your own (this is considered plagiarism)

The keys to reliability and credibility include the following:

• Recency - when was it written; in general (but not always) later publications are more reliable
• Sponsorship - who sponsored the research
• Authorship - author’s bias or affiliations
• Peer review - has the article or publication been subject to peer review or other scrutiny

The purpose of this case is to show you how the equity method actually works. The case starts with the economic and business reasons behind joint ventures. Remember - accounting does not happen in a vacuum! Accounting is the language of business. For that reason, we must understand the numbers that we are calculating and exactly what we are communicating to investors and other users. If the accountants can’t understand what they are presenting, who can? Spend time reviewing the posted Wendy’s financial statements, and discuss the points below. I want to make sure that you understand the effects of the equity method on the balance sheet, income statement, and the statement of cash flows. Be thorough when answering these questions!

1. Conceptual Discussion

1. In general, discuss why companies enter into joint-venture agreements.

1. Consistent with US GAAP, Wendy’s uses the equity method to account for its joint venture in TimWen. Briefly explain this accounting method. Be sure to comment on how the investing company accounts for its initial investment and any subsequent income and dividend activity of its investee. Be sure to properly cite your sources, if any.

1. When a company purchases shares 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? Be specific.

1. Processes
   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?

1. 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 TimeWen’s equity at December 30, 2013. What accounts for the difference between these two amounts? Show calculations to reconcile the two figures.

1. Consider the information disclosed in Note 8 regarding Wendy’s investment in the TimWen Joint Venture.
   • How did Wendy’s equity method investment in TimWen affect their earnings before taxes in 2012 and 2011? Where does this appear in Wendy’s consolidated statements of operations?
   • Prepare the journal entry to record Wendy’s share of TimWen’s 2012 earnings.
   • What is the amount of amortization of the purchase price adjustments in 2012? Prepare the journal entry to record the amortization for the purchase price adjustments for 2012.
   • What amount of dividends did Wendy’s receive from the TimWen joint venture in 2012 and 2011? Prepare the journal entry to record the receipt of dividends form TimWen for 2012.

1. Consider the information in the statement of cash flows.
   • 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 in 2012. Reconcile this amount to the information disclosed in Note 8. Explain why a negative adjustment is made to arrive at net cash from operating activities.
   • The operating section also reports a positive adjustment for “Distributions received from joint 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.

1. Analysis
   1. Some argue that the equity method of accounting is a form of off-balance sheet financing because the liabilities of the investee are not included with the liabilities of the investor, but are netted with the investee’s assets.
      • 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 will use the balance sheet information for TimWen that is disclosed in Note 8.
      • Are you concerned about off-balance sheet financing related to the TimWen joint venture? Why or why not?

1. 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? Show calculations.

1. Both US GAAP and IFRS requires 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.
   • If Wendy’s accounted for its investment in TimWen using the proportionate consolidation method, by what percentage would their 2012 net income and total stockholders’ equity increase? Show calculations.
   • In your opinion, which accounting treatment better reflects the economic reality of Wendy’s joint-venture investment, the equity method or consolidation? Explain.

Answer rating: 100% (QA)

Intergen Analysis 1 Projected Income Statements for Intergen and Ryan a Intergen Sales 1025000 fixed Cost of goods sold 850000 Gross profit 175000 Operating expenses 150000 Operating income 25000 b Ry... View the full answer