Accounting Exercise

Exercise 7A
This assignment asks you to examine debt-related information for Wendy’s
(NASDAQ:WEN), a quick-service restaurant chain. The questions refer to the financial
statements and notes in Exhibit 1.
1) What is Wendy’s total debt, excluding leases? In aggregate, was the debt issued at a
premium, par, or a discount?
2) Answer the following questions about Wendy’s 7% debentures, which are publicly
traded.
What is the outstanding principal
(face value) of the debentures?
Were the debentures issued at a
discount, par, or premium?
What is the annual coupon payment
for the debentures?
Is the annual interest expense for
the debentures more or less than the
annual coupon payment?
At December 31, 2023, is the yield to
maturity (YTM) for the debentures
more or less than the 7% coupon
rate?
At December 31, 2023, is the YTM
for the debentures more or less than
the historical interest rate used for
the debentures’ carrying value?
1
3) Note 12 states that Wendy’s had the following early redemptions of debt during
2023:
Note
Principal
Class A-2 Notes $ 29,171
7% debentures
40,430
Total
$ 69,601
–
Paid
$ 24,935
40,517
$ 65,452
=
Difference
$ 4,236
(87)
$ 4,149
+
Other*
= Gain (Loss)
(322)
(1,544)
$ (1,866)
$ 3,914
(1,631)
$ 2,283
$
* ‘Other’ includes unamortized discount/premium and transaction costs.
•
Use the following table to summarize the pretax impact of the early
redemptions on the financial statements, labeling the cash flow category for
any cash impacts and noting any income-related impacts on equity. Assume
that all of the ‘Other’ components of the gain or loss pertain to transaction
costs paid to bankers.
Assets
•
Liabilities
Equity
The gain on redeeming Class A-2 Notes increased Wendy’s income. Despite
that, what is a sense in which the gain could reflect bad news?
2
4) Use the following table to summarize the pretax impact of hypothetical transactions
on the financial statements, labeling the cash flow category for any cash impacts and
noting any income-related impacts on equity.
Assets
Liabilities
Equity
Paid $55 coupon on a longterm bond previously
issued at par. Assume that
no interest expense had
been previously accrued
Paid $90 on a short-term,
zero-coupon loan,
consisting of $85 of
principal and $5 of interest
recognized in the current
period.
Borrowed $50 from a bank,
with 5% annual interest
rate to be repaid in one
year.
Issued $50 of bonds at par,
with a 5% annual coupons
payment. The bonds
mature in in five years.
3
Exhibit – Wendy’s financial statements and notes
THE WENDY’S COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Dec 31,
2023
(In Thousands Except Par Value)
Jan 1, 2023
ASSETS
Cash and cash equivalents
$ 516,037 $ 745,889
Restricted cash
35,848
35,203
Accounts and notes receivable, net
121,683
116,426
Inventories
6,690
7,129
39,640
117,755
26,963
126,673
837,653
1,058,283
Properties
891,080
895,778
Finance lease assets
Operating lease assets
228,936
705,615
234,570
754,498
Prepaid expenses and other current assets
Advertising funds restricted assets
Total current assets
Goodwill
Other intangible assets
773,727
773,088
1,219,129
1,248,800
Investments
34,445
46,028
Net investment in sales-type and direct financing leases
313,664
317,337
Other assets
178,577
170,962
Total assets
$ 5,182,826 $ 5,499,344
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current portion of long-term debt
29,250 $
29,250
Current portion of finance lease liabilities
20,250
18,316
Current portion of operating lease liabilities
49,353
48,120
Accounts payable
27,370
43,996
Accrued expenses and other current liabilities
135,149
116,010
Advertising funds restricted liabilities
120,558
132,307
381,930
387,999
Total current liabilities
Long-term debt
$
2,732,814
2,822,196
Long-term finance lease liabilities
568,767
571,877
Long-term operating lease liabilities
739,340
792,051
Deferred income taxes
270,353
270,421
Deferred franchise fees
90,132
90,231
Other liabilities
Total liabilities
89,711
98,849
4,873,047
5,033,624
Stockholders’ equity:
Common stock, $0.10 par value; 1,500,000 shares authorized; 470,424 shares
issued; 205,397 and 213,101 shares outstanding, respectively
Additional paid-in capital
Retained earnings
Common stock held in treasury, at cost; 265,027 and 257,323 shares, respectively
Accumulated other comprehensive loss
Total stockholders’ equity
Total liabilities and stockholders’ equity
47,042
47,042
2,960,035
2,937,885
409,863
414,749
(3,048,786) (2,869,780)
(58,375)
(64,176)
309,779
465,720
$ 5,182,826 $ 5,499,344
4
THE WENDY’S COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands Except Per Share Amounts)
Year Ended
Dec 31, 2023 Jan 1, 2023
Revenues:
Sales
Franchise royalty revenue and fees
Franchise rental income
Advertising funds revenue
Jan 2, 2022
$ 930,083 $ 896,585 $ 734,074
592,331 558,235 536,748
230,168 234,465 236,655
428,996 406,220 389,521
2,181,578 2,095,505 1,896,998
Costs and expenses:
Cost of sales
Franchise support and other costs
Franchise rental expense
Advertising funds expense
General and administrative
Depreciation and amortization (exclusive of amortization of cloud
computing arrangements shown separately below)
Amortization of cloud computing arrangements
System optimization gains, net
Reorganization and realignment costs
Impairment of long-lived assets
Other operating income, net
794,493
57,243
125,371
428,003
249,964
773,169
46,736
124,083
430,760
254,979
611,680
42,900
132,411
411,751
242,970
135,789
12,778
(880)
9,200
1,401
(13,768)
133,414
2,394
(6,779)
698
6,420
(23,683)
125,540
—
(33,545)
8,548
2,251
(14,468)
1,799,594 1,742,191 1,530,038
Operating profit
Interest expense, net
Gain (loss) on early extinguishment of debt, net
Investment (loss) income, net
Other income, net
381,984 353,314 366,960
(124,061) (122,319) (109,185)
2,283
— (17,917)
(10,358)
2,107
39
29,570
10,403
681
Income before income taxes
Provision for income taxes
279,418
(74,978)
Net income
Net income per share:
Basic
Diluted
243,505
(66,135)
240,578
(40,186)
$ 204,440 $ 177,370 $ 200,392
$
.98 $
.97
.83 $
.82
.91
.89
5
THE WENDY’S COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In Thousands)
Common
Stock
Additional
Paid-In
Capital
Balance at January 3, 2021
$ 47,042 $
2,899,276
Common
Stock Held in
Treasury
Retained
Earnings
$
238,674
$
(2,585,755)
Accumulated
Other
Comprehensive
Loss
$
(49,641)
Total
$
549,596
Net income
—
—
200,392
—
—
Other comprehensive income, net
—
—
—
—
1,441
1,441
Cash dividends
—
—
(94,846)
—
—
(94,846)
Repurchases of common stock,
—
(18,750)
—
(249,058)
—
(267,808)
Share-based compensation
—
22,019
—
—
—
22,019
Common stock issued upon
exercises of stock options
—
1,911
—
27,139
—
29,050
Common stock issued upon
vesting of restricted shares
—
(6,023)
—
2,285
—
(3,738)
Other
—
200
(22)
121
—
299
47,042
2,898,633
344,198
(2,805,268)
(48,200)
436,405
Net income
—
—
177,370
—
—
177,370
Other comprehensive loss, net
—
—
—
—
(15,976)
(15,976)
Cash dividends
—
—
(106,779)
—
—
(106,779)
Repurchases of common stock
—
18,750
—
(70,700)
—
(51,950)
Share-based compensation
—
24,538
—
—
—
24,538
Common stock issued upon
exercises of stock options
—
1,117
—
3,461
—
4,578
Common stock issued upon
vesting of restricted shares
—
(5,363)
—
2,482
—
(2,881)
Other
—
210
(40)
245
—
415
Balance at January 2, 2022
Balance at January 1, 2023
200,392
47,042
2,937,885
414,749
(2,869,780)
(64,176)
465,720
Net income
—
—
204,440
—
—
204,440
Other comprehensive income, net
—
—
—
—
5,801
5,801
Cash dividends
—
—
(209,253)
—
—
(209,253)
Repurchases of common stock
—
—
—
(191,871)
—
(191,871)
Share-based compensation
—
23,747
—
—
—
23,747
Common stock issued upon
exercises of stock options
—
4,366
—
9,873
—
14,239
Common stock issued upon
vesting of restricted shares
—
(6,193)
—
2,748
—
(3,445)
Other
—
230
(73)
244
—
401
Balance at December 31, 2023
$ 47,042 $
2,960,035
$
409,863
$
(3,048,786)
$
(58,375)
$
309,779
6
THE WENDY’S COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
Year Ended
Dec 31, 2023
Jan 1, 2023
Cash flows from operating activities:
Net income
$
204,440 $
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization (exclusive of cloud computing)
135,789
Amortization of cloud computing arrangements
12,778
Share-based compensation
23,747
Impairment of long-lived assets
1,401
Deferred income tax
(807)
Non-cash rental expense, net
40,655
Change in operating lease liabilities
(47,212)
Net receipt (recognition) of deferred vendor incentives
1,034
Other, net
(3,528)
Changes in operating assets and liabilities:
Accounts and notes receivable, net
430
Inventories
439
Prepaid expenses and other current assets
(672)
Advertising funds restricted assets and liabilities
(18,210)
Accounts payable
(8,826)
Accrued expenses and other current liabilities
3,958
177,370
Jan 2, 2022
$
200,392
133,414
2,394
24,538
6,420
4,305
33,915
(45,682)
(1,060)
(30,601)
125,540
—
22,019
2,251
(13,781)
40,596
(45,606)
715
(16,958)
(5,857)
(1,203)
6,769
(30,503)
(1,533)
(12,782)
(5,613)
(872)
(3,396)
11,519
7,586
21,380
345,416
259,904
345,772
(85,021)
(7,951)
—
2,115
4,311
(85,544)
(3,605)
—
8,237
3,136
(77,984)
—
(123,069)
55,118
(8,734)
(86,546)
(77,776)
(154,669)
—
(94,702)
(21,588)
(189,554)
(209,253)
10,794
500,000
(26,750)
(17,312)
(51,950)
(106,779)
(8,535)
1,100,000
(970,344)
(13,640)
(268,531)
(94,846)
4,619
(504,303)
288,674
(242,742)
Net change in cash before effect of exchange rate changes
Effect of exchange rate changes on cash
(245,433)
2,448
470,802
(5,967)
(51,639)
364
Net (decrease) increase in cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash at beginning of period
(242,985)
831,801
464,835
366,966
(51,275)
418,241
Net cash provided by operating activities
Cash flows from investing activities:
Capital expenditures
Franchise development fund
Acquisitions
Dispositions
Other
Net cash used in investing activities
Cash flows from financing activities:
Proceeds from long-term debt
Repayments of long-term debt
Repayments of finance lease liabilities
Repurchases of common stock
Dividends
Other
Net cash (used in) provided by financing activities
Cash, cash equivalents and restricted cash at end of period
$
588,816
$
831,801
$
366,966
7
(12) Long-Term Debt
Long-term debt consisted of the following:
Year End
Dec 31, 2023
Class A-2 Notes:
4.236% Series 2022-1 Class A-2-I Notes, anticipated repayment date 2029
4.535% Series 2022-1 Class A-2-II Notes, anticipated repayment date 2032
2.370% Series 2021-1 Class A-2-I Notes, anticipated repayment date 2029
2.775% Series 2021-1 Class A-2-II Notes, anticipated repayment date 2031
3.783% Series 2019-1 Class A-2-I Notes, anticipated repayment date 2026
4.080% Series 2019-1 Class A-2-II Notes, anticipated repayment date 2029
3.884% Series 2018-1 Class A-2-II Notes, anticipated repayment date 2028
7% debentures, due in 2025
$
98,500 $
390,134
423,269
633,530
357,673
403,123
441,099
48,237
Jan 1, 2023
99,500
398,000
443,250
640,250
364,000
409,500
451,250
86,369
Total long-term debt, net of unamortized discounts and premiums
Unamortized debt issuance costs
2,795,565
(33,501)
2,892,119
(40,673)
Less amounts payable within one year
2,762,064
(29,250)
2,851,446
(29,250)
Total long-term debt
$ 2,732,814 $ 2,822,196
Aggregate annual maturities of long-term debt, excluding the effect of purchase accounting adjustments,
as of December 31, 2023 were as follows:
Fiscal Year
2024
$
29,250
2025
78,820
2026
374,923
2027
25,250
2028
442,599
Thereafter
1,846,056
$
2,796,898
Senior Notes
During the year ended December 31, 2023, the Company repurchased $29,171 in principal of its Class A-2
Notes for $24,935. As a result, the Company recognized a gain on early extinguishment of debt of $3,914 for the
year ended December 31, 2023.
Covenants and Restrictions
The Senior Notes are subject to customary rapid amortization events provided for in the Indenture,
including events tied to failure to maintain stated debt service coverage ratios, the sum of global gross sales for
specified restaurants being below certain levels on certain measurement dates, certain manager termination
events, an event of default, and the failure to repay or refinance the Class A-2 Notes on the applicable scheduled
maturity date. In addition, the Indenture and the related management agreement contain various covenants
that limit the Company and its subsidiaries’ ability to engage in specified types of transactions, subject to certain
exceptions, including, for example, to (i) incur or guarantee additional indebtedness, (ii) sell certain assets, (iii)
create or incur liens on certain assets to secure indebtedness or (iv) consolidate, merge, sell or otherwise
dispose of all or substantially all of their assets.
8
Debt Issuance Costs
During 2022 and 2021, the Company incurred debt issuance costs of $10,232 and $20,873 in connection
with the issuance of the 2022-1 Class A-2 Notes and the June 2021 refinancing transaction. The debt issuance
costs are being amortized to “Interest expense, net” through the anticipated repayment dates of the Class A-2
Notes utilizing the effective interest rate method. As of December 31, 2023, the effective interest rates,
including the amortization of debt issuance costs, were 4.0%, 4.0%, 4.2%, 2.5%, 2.9%, 4.7% and 4.7% for the
Series 2018-1 Class A-2-II Notes, Series 2019-1 Class A-2-I Notes, Series 2019-1 Class A-2-II Notes, Series 20211 Class A-2-I Notes, Series 2021-1 Class A-2-II Notes, Series 2022-1 Class A-2-I Notes and Series 2022-1 Class
A-2-II Notes, respectively.
Other Long-Term Debt
Wendy’s 7% debentures are unsecured and had outstanding principal of $49,570 and $90,000 at December
31, 2023 and January 1, 2023, respectively. During 2023, Wendy’s repurchased $40,430 in principal of its 7%
debentures for $40,517. As a result, the Company recognized a loss on early extinguishment of debt of
$1,631 during 2023.
Interest Expense
Interest expense on the Company’s long-term debt was $112,659, $110,751 and $98,356 during 2023,
2022 and 2021, respectively, which was recorded to “Interest expense, net.”
(13) Fair Value Measurements
The following table presents the carrying amounts and estimated fair values of the Company’s financial
instruments:
Year End
December 31, 2023
Financial liabilities (b)
Series 2022-1 Class A-2-I Notes
Series 2022-1 Class A-2-II Notes
Series 2021-1 Class A-2-I Notes
Series 2021-1 Class A-2-II Notes
Series 2019-1 Class A-2-I Notes
Series 2019-1 Class A-2-II Notes
Series 2018-1 Class A-2-II Notes
7% debentures, due in 2025
January 1, 2023
Carrying
Amount
Fair
Value
Carrying
Amount
Fair
Value
98,500
390,134
423,269
633,530
357,673
403,123
441,099
48,237
92,289
370,577
362,572
530,581
341,606
374,058
412,754
49,431
99,500
398,000
443,250
640,250
364,000
409,500
451,250
86,369
89,401
349,444
357,304
499,011
334,334
361,875
405,809
92,367
2,795,565
2,533,868 2,892,119 2,489,545
(b)The fair values were based on quoted market prices in markets that are not considered active markets.
9