Question

Toby's Foods Limited (TFL) is in the supermarket business. It is a public company and is thinking of going private (i.e., of buying up all of its shares that are available). The funds will come from a private consortium. The consortium has offered to buy all the shares if the share price hits a certain level. Although the company has come through some tough times, things have been looking up recently. This is partially due to a new strategy to upgrade the stores and increase square footage.
TFL obtains revenues from two sources: in-store sales to customers and fees from sales of new franchises and continuing franchise fees. This year was a banner year for sales of new franchises. The company sold and booked revenues for 10 new franchised stores. Most of these new stores have not yet opened but locations have been found and deposits have been taken from each of the franchisees.
Under the terms of the franchise contracts, TFL has agreed to absorb any losses that the stores suffer for the first five years. Based on market research, however, and the location of the new stores, it is highly unlikely that losses will occur.
Just in case, TFL has requested that franchisees deposit a certain amount of money in a trust fund. In addition, TFL has agreed to issue shares of TFL to the franchisees if the stores are profitable in the first two years.
During the year, TFL issued long-term debt that is convertible into common shares of the company. The number of common shares varies depending on the share price. Because of the potential for taking the company private, TFL agreed to certain concessions. If the company goes private, TFL must pay back 120% of the face value of the debt.
Instructions
Assume the role of the controller and discuss the financial reporting issues.


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  • CreatedAugust 23, 2015
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