You should start with an overview of the major users of the financial statements and their needs, then followed by identifying accounting issues and analyzing 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.

You will be evaluated based on:

a. Number of issues addressed

b. 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

c. Effectiveness in communication.

Burger's Home Inc.

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. Draft balance sheet is presented in Exhibit III.

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. The brothers expect the report by December 3^rd, 2021.

New Franchisee

In April 2021, Brad and Jenny Smith contacted Frank because they would like to join the franchise family of BHI. They are the first and only franchisee so far and BHI hopes to close a few more deals in early 2022. On top of paying for the initial franchise fees as stipulated in the agreement, they asked BHI to help with financing the construction and renovation of the new restaurant. The construction expenditure amounted to $850,000 and BHI agreed to provide $250,000 interest free over the term of the franchise. A loan of this nature normally carries an effective interest rate of 8%. The first annual payment is due March 31, 2022.

The new restaurant was up and running on July 1^st, 2021. Brad and Jenny were on time with the initial franchise payments and advertising funds but missed the October payment for the continuing franchise fees.

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.