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 cant understand what they are presenting, who can? Spend time reviewing the posted Wendys 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! Conceptual Discussion In general, discuss why companies enter into joint-venture agreements. Consistent with US GAAP, Wendys 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. 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. Processes Consider the information in Note 8. What amount did Wendys include on its 2012 and 2011 balance sheets for their equity method investments? Where does this appear on Wendys consolidated balance sheet? Using information in Note 8, compare the amount recorded for Wendys investment in TimWen at December 30, 2012 with Wendys 50% share of TimeWens equity at December 30, 2013. What accounts for the difference between these two amounts? Show calculations to reconcile the two figures. Consider the information disclosed in Note 8 regarding Wendys investment in the TimWen Joint Venture. How did Wendys equity method investment in TimWen affect their earnings before taxes in 2012 and 2011? Where does this appear in Wendys consolidated statements of operations? Prepare the journal entry to record Wendys share of TimWens 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 Wendys receive from the TimWen joint venture in 2012 and 2011? Prepare the journal entry to record the receipt of dividends form TimWen for 2012. 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. AnalysisSome 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 investees assets. Determine the amount of off-balance sheet debt associated with the TimWen joint venture on Wendys 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? The equity method of accounting also does not allow the investor to include their share of the investees revenues along with other revenues reported in the income statement. By what percentage would Wendys 2012 reported revenues increase if it were to include its share of TimWens revenues in the revenue line of the income statement? Show calculations. 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 Wendys 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 Wendys joint-venture investment, the equity method or consolidation? Explain.