KickButt Coffee Shoppes' - Case Study

Carol Yang just graduated from York University with her BCom and went back to home to Calgary to look for a fulltime job. Living at home saves a lot of money. Her parents said she can live at home free for one year after she starts her full-time job. The next day Carole walked to the Crowfoot Crossings Mall and dropped into the "KickButt Coffee Shoppes" located in the outside corner of the Food Court, where she has worked part time as a barista and assistant manager during high school and the summers while attending York University. She wanted to talk to her old friends and catch up with the local gossip.

"KickButt Coffee Shoppes" have over 40 locations in Alberta and in British Columbia ski areas, which are owned by Michael Butt and his sister Sarah. The Butt family are well known in Alberta since they support children's hospital charities in Calgary, Edmonton and overseas in Colombia. It all dates to 1965 when Dr. Michael Butt Sr. (Michael's father) was doing his pediatrician internship in Salento Colombia. Salento is a small village 260 km south of Medellin in the centre of the Colombia's Coffee triangle and the Rain Forest.

Since 1967 Dr. Butt spends two months a year working at the hospital that he and fellow doctors created. The patients at this hospital do not have to pay, since the doctors are donating their time. Over the years people in the region started donating to the hospital bags of high-quality coffee beans for payment. Mrs. Samantha Butt (Michaels mother) who also donated her time at the hospital had an idea, to start a coffee shop in Calgary to use some of these coffee beans and donate some of the profits back to the hospital and other charities. So, in 1968 "KickButt Coffee Shoppes" was born. The business expanded to the point that they were the major exporter of Fair-Trade Organic coffee from this region, coffee roaster and own a large trucking fleet in Colombia and Canada. The business employed over 800 people and is very profitable in 2015, they donated over $25 million dollars to the charities they supported. The coffee business was growing too fast and large for Samantha Butt to operate and she placed her children Michael and Sarah into senior management positions of the company.

After almost 50 years in business, Michael and Sarah are thinking of expanding the number of coffee shops by franchising.

At the coffee shop Carol ran into Michael, he congratulated her on her degree. He asked

her what she planned on doing now and her future dreams and goals since she was looking for

fulltime employment. One of Carols dreams was someday owning her own business since she

has a wide background in Accounting and Marketing. Michael had asked her if she owned a

"KickButt Coffee Shoppes" what she would do. Since Carol worked as a coffee roaster and

barista the pass couple of years, she had a very good knowledge of coffee blending. She told

Michael that at York she purchased raw coffee beans and roasted them herself. It was so easy,

even her roommates learn how to roast and created different blend of coffees. Some of the ideas

Carol came up with are:

1) Introduce a KickButt Loyalty program,

2) Make gift card program so customers can buy them and give out as gifts,

3) Introduce Breakfast Sandwiches,

4) Add baked goods such as Croissant's and Donuts,

5) Blended Frozen Fruit Drinks,

6) Introduce one-hour coffee education workshops where customers pay $15 per session

in advance and receive a $10 Gift Card when completed. Types of training can include:

A). How to roast your own coffee (DIY - Do it Yourself),

B). How to make own coffee blends,

C). Cooking with coffee,

An added benefit of these workshops is that "KickButt Coffee Shoppes" would sell all of

the materials needed that they used in the workshops for home use.

"These ideas sound very good and we should try implementing them if we can, since

some of the mall locations have restrictions as to what we can sell and do", Michael replied with

interest. Carol ask Michael for an example. "Take McDonalds in this mall, since KickButt

Coffee Shoppes main business is selling coffee, we stopped McDonalds in this mall from selling

their specialty coffees and dark roasted coffee", this has helped in many ways since we are the

only game in town, the mall patrons come to us for the specialty coffees and not McDonalds,

answered Michael.

After talking most of the afternoon, Michael had a plan and asked if Carol can have an

official meeting with him and his sister the next day. Carol happily agrees and could not help

thinking about what Michael and Sarah would offer.

The next day Carol met with Sarah and Michael. Sarah started by talking about her fond

memories about the time spent together with Carol in the past nine years and referred to Carol as

dear as her daughter. Then she proposed the following offer: "Since Michael and I have decided

to start franchising the KickButt Coffee Shoppes, we would like you to be our very first

franchisee if you wish. We offer to wave all the financial requirements, including a start-up

license fee of $550,000, 10-year license to use our brand name and a $35,000 line of credit at

12% (use 1% per month) to cover starting costs and any additional expenses. Carol's business

would pay back the line of credit and interest over time once the business starts making a profit.

Carols jaw dropped - she cannot believe what has happened.

Michael continued to offer:" And that's not all! To make your start easier, we are not

giving you a new location; instead, we are giving you an existing location. The location will be

this one - Crowfoot Crossings. You can start tomorrow to learn the procedures, details in our

head office, and the location will be yours starting May 1st two weeks from this Friday after

ownership transfer documents are properly completed.

Sarah stepped in and said that Michael was so excited about this they he did not wait for

your reply. So, what is it?

Carol said of course "Yes, I can't hardly wait to tell my parents".

During the two weeks at Head Office the following details about the transfer were covered,

1) The Point of Sales terminals (POS) will be used and connected to the Head Office computer

system recording all sales, credit card processing, employee payroll, inventory tracking and

replenishment. This will save a lot of time of the owner of the franchise and Carol will pay a

service fee for the use of it equivalent to 0.5% of total gross sales. Payment is required by the

fifth day of the following month.

2) Credit and Debit card processing fees 2% of total credit card sales, to deposit and process the

credit card sales. The Credit and Debit Card sales will automatically be posted deposited to the

stores Bank Account at the end of the week less the processing fees.

3) Payroll processing fees- of $150 for each pay period, this fee is for process all deductions,

taxes, health tax, vacation pay, T4's, data input, and any other deductions. The fee is paid when

employees are paid their salaries. Payroll is the middle of the two-week pay cycle, so existing

employees will be getting paid for working from May 1st to 8th. These salaries will be paid on

May 15th, the date of the employee's regular pay period. This system will also handle employee

expense account payments and deductions. The second payroll for the employees working for

Carol will be on May 29th for working hours from May 9th to May 22.

4) The KickButt Coffee Shoppes automatic inventory replenishment system is amazing. It

forecasts inventory requirements based on store's past and current sales and knows what has

been used (it also calculates the Cost of Goods Sold) and will predict the number of stir sticks to

be used in the next 5 days. Carol will do physical inventory at the end of every month.

The system will automatically order the required coffee supplies based on its estimates and the

store will be invoiced when items are received, payable in 10 days after the receipt of the

invoice. The inventory is tracked in three categories: coffee products, dairy products and supplies

(including cups, lids, stir sticks), which make it easy to control and account for.

5) KickButt Coffee Shoppes monthly Royalty, Corporate Advertising, and Charities fees of 7.5%

of gross sales to be paid on the first day of the following month during the term of the license,

6) The cost of the all inventory and store fixtures and equipment will be transferred at Book

Value to Carol even though the market value for the fixtures and equipment are worth a lot more.

The transfer of these assets will be charged against her Line of credit.

7) KickButt Coffee Shoppes will do the legal work for Carol to set up her franchise as a

corporation starting May 1st, set up the employer identification number, open all business bank

accounts required, and obtain HST numbers. The legal work will be done free of charge by

KickButt Coffee Shoppes' legal department and Carol will just have to pay the related fees of the

above set-ups. These fees totaled $3,500 and will be charged to the line of credit account.

8)The starting inventory and all the equipment will arrive April 24th along with the keys of the

store. An Invoice dated May 1, will be sent to Carol's company and the amount will be charged

to Carol's line of credit account on May 1st.

9) The location in the Food court has a 10-year lease dated May 1st and requires prepaying four

months of rent on the fifth day of January, May and September. The rent for the locations is

$2,400 per month for the mall location.

10) The mall receives a 4% of gross sales to be paid the first day of the month for last month's

sales as per the terms of the lease.

11) Carol will be taking a salary of $500.00 per pay date starting the first pay on May 15th.

Transactions for the month of May.

Questions:-

i) Form balance sheet, income statement for the same.

ii) Form the adjusted and unadjusted trial balance (if applicable) using accrual accounting

iii) Prepare Journal entries and T accounts in Accrual and Cash Basis.