Burger’s Home Inc (BHI) is a private fast-food chain established ten years ago by two brothers – Frank and Malcolm. Frank is in charge of accounting and finance while Malcolm focuses on operations. BHI’s specialty is selling high-quality, organic burgers at competitive prices. The beef is sourced locally at an organic cattle farm which supplies to all of BHI’s restaurants. BHI has grown steadily over the years to fifteen corporately owned locations in Ontario. Prior to the pandemic, the brothers were gearing up to expand the chain into a franchise. Negotiations with potential franchisees halted when the pandemic hit but in May 2021, several interested parties came back to the negotiation table. Extracts of the Franchisor Agreement are presented in Exhibit I and Exhibit II.

BHI’s long-term loan with their local bank is coming due shortly after the end of the year. The brothers would like to refinance this debt with the bank but they were also contacted by a private investor who is interested in providing either equity or debt financing to BHI. The investor requires an audited set of financial statements before he makes the decision. In the current loan agreement with the bank, there are two covenants: the debt-to-equity ratio must be no higher than 0.7 and the current ratio must be greater than 2. It is likely that the bank will offer similar terms if they choose to refinance with the bank. The brothers are not sure if they are in compliance or not with the covenants and they also would like to know how the accounting impact of the events this year may affect their financing plan. BHI’s year-end is November 30th and it follows ASPE. 

It is now November 3, 2021. You, CPA, are the new controller at BHI and just joined the

company in October. You have been asked to establish all the necessary accounting policies to complete this year’s financial statements because this is the first year the chain receives an audit. In particular, the brothers would like you to establish solid accounting policies pertaining to franchising with regard to revenue recognition and financing for franchisees. You also need to address the queries raised by the brothers and discuss the accounting implications of this year’s events.

Pandemic cubicles and pandemic patios

The brothers wanted to be ready when their restaurants were able to reopen in 2021 and thus they decided to permanently change the inside of their restaurants so that patrons felt safe. Early in the year, the brothers installed cubicles in all of their locations so that families can sit together comfortably while being physically separated from other patrons. This allowed the business to have more sitting available. Total cost of the cubicles was $225,000.

Where it was possible, the brothers also decided to open up patios. In summer 2021, this allowed some locations to serve customers earlier than others that did not have a patio. Setting up patios simply meant buying some fencing, extra chairs and tables and floor plant pots. The owners are not sure if they will be permitted to open up these temporary patios again next year. The owners firmly believed that opening up the ratios has made their offering to the customer a lot better in these turbulent times. In fact, management mentioned that the association of restaurant holders is lobbying the government to commit to keeping newly established patios for at least two more years. The total cost of opening up the patios was $60,000.

The brothers borrowed $100,000 to partially fund for the pandemic cubicles and patios from their uncle. While the uncle did provide the financing, he charged an interest rate above market of 10%. The uncle required the amount be paid on demand should he need the money for personal emergencies.

Fire Accident

Another issue that the brothers had to deal with this year was a fire at one of the restaurants in early October. Luckily, the fire was quickly contained and thus the damage was limited to some kitchen equipment only. The equipment could not be repaired or restored because of water damage but management did manage to arrange for a sale of the spare parts from the equipment. The sale will take place on December 1, 2021. Despite the fact that the damage was limited, the brothers knew that it would take some time to get the restaurant reopen again as the fire department has to do an investigation before giving the green light to reopen. Thus, the brothers decided to do some minor renovations including putting in new floors and repainting. They thought it might be a wise decision given that the fire accident did leave behind a bit of a smell. The minor renovation cost $25,000. According to Malcolm, the place looks so much more welcoming after the renovation.

All the monies spent on renovations due to the fire and the pandemic are included in long lived assets. The brothers would like to keep the damaged equipment on the books at their current carrying value until the sale takes place in December.

Required: 

Depth of analysis on each issue. Depth is measured by citing appropriate accounting criteria, discussing alternative accounting treatments when appropriate, supporting with case facts and calculations, and drawing a reasonable conclusion. You should start with an overview of the major users of the financial statements and their needs, then followed by the identifying accounting issues and analyze them one by one. Remember to draw conclusions after analyzing each issue. There should be a concluding paragraph that summarizes your findings that will address the owners’ most pressing concerns.

Answer rating: 100% (QA)

Burgers Home Incorporation which is started by two brothers faced the following issues a The company has to pay the first loan payback shortly after t... View the full answer