Darden Restaurants, Inc. Preparing Financial Statements

Darden Restaurants, Inc. was incorporated in Florida in 1995 but its parent company, GMRI, began in 1968 as Red Lobster Inns of America. Now Darden Restaurants is the largest publicly held casual dining restaurant company in the world. In 2007, the company served over 350 million meals in 1,397 restaurants in the United States and Canada. The company operates the following restaurants: Red Lobster, Olive Garden, Bahama Breeze, Smokey Bones Barbeque & Grill and Seasons 52. (Source: Company Form 10-K)

Learning Objectives

• Determine how economic events affect a company's financial statements.
• Record economic events and prepare a simple set of financial statements.
• Understand how to adjust financial statements for accruals and reclassification.

In this case you will record basic transactions to recreate the May 27, 2007, balance sheet and income statement for Darden Restaurants, Inc. The company's actual financial statements are included at the end of the case. You can use them to guide your work. Note: All dollar figures are in millions.

To complete this case you need to develop a computerized spreadsheet. The structure of the spreadsheet follows after the case questions. Because of space constraints, the spreadsheet is reproduced on sequential pages here. However, you should create one worksheet with all the accounts across the top.

Use the numbers from Darden's actual financial statements to enter the opening (i.e., May 28, 2006) and ending (i.e., May 27, 2007) Balance Sheets and Statements of Earnings balances into the accounts on your spreadsheet. Create two separate accounts for "Land, building and equipment," one for the original cost of these assets (2006: $4,228.5 and 2007: $3,961.4) and a second account for the related accumulated depreciation (2006: $1,782.5 and 2007: $1,777). Show this second account as a negative amount (because it is a contra-asset account) so that the sum of the two accounts combined equals the "Land, building and equipment, net" amount on the balance sheet (2006: $2,446.0 and 2007: $2,184.4). Some smaller balance sheet accounts have been combined in the spreadsheet. The Statement of Earnings accounts should have opening balances of $0.

The row labeled "Unadjusted trial balance" should be defined so that each cell equals the sum of the opening balance and the transactions in that column. The row labeled "Pre-closing balances" should be defined so that each cell equals the sum of the "Unadjusted trial balance" and the adjustments and reclassifications in that column.

The last row (i.e., May 21, 2007, Actual Balance Sheets and Statements of Earnings) serves as a check that your year-end balances are correct. You can define another row that calculates the difference between the actual year-end balances and your calculated balances. A necessary (but not sufficient) condition for a correct spreadsheet is that the value in each cell of the "difference" row is equal to zero.

Some transactions will affect only the balance sheet (e.g. transaction #1), some will affect both the balance sheet and the income statement (e.g. transaction #2). Indicate increases in each account as positive numbers and decreases in each account as negative numbers.

Use the "Retained Earnings" account only for the dividend entry (#23) and the closing entry. Record the transactions and adjustments that affect Statement of Earnings accounts directly to the appropriate revenue and expense accounts. You will close these temporary accounts to "Retained Earnings" in part g of the case.

Concepts -

a. Prior to examining Darden's balance sheet, think about what a restaurant chain does. What accounts do you expect to see on the balance sheet? Which are the major assets? Liabilities?

Process -

b. Record each of the following transactions for the year ended May 27, 2007, in the spreadsheet. All figures are in millions of dollars.

1. The company purchased $1,754.4 of food and beverage inventory on account.

2. The company had $5,816.5 in sales to customers. Of this $149.3 was on account.          

3. The cost of the food and beverage sold (#2 above) was $1,663.4.

4. The company paid cash for restaurant employees' wages and other labor expenses totaling $1,8756.

5. The company paid cash for restaurant expenses totaling $888.

6. The company sold gift cards for which it collected $117.6 in cash. The cards expire in one year. The company does not recognize this as revenue until customers actually use (redeem) the cards.

7. The company paid cash for selling, general and administrative expenses totaling $473.8.

8. The company collected $140 of accounts receivable.

9. The company paid cash of $345.2 to purchase new equipment and cash of $2.2 to acquire other long-term assets.

10. Darden Restaurants' management signed a new labor agreement with its employees. The two-year agreement takes effect on July 1, 2007, and calls for total wage and benefit increases of $120 per year.

11. Darden Restaurants disposed of equipment that had a net book value of $61 for cash proceeds of $57.9. The difference is considered an operating loss on the statement of earnings and is included in "Selling, general and administrative" expense. The equipment had an original cost of $110.

12. The company paid $1,752.5 to settle accounts payable.

13. During the year, the company paid bondholders $40.1 of interest.

14. Customers redeemed gift cards totaling $108.5.

15. On May 15, 2007, Darden paid $33.5 for casualty and property insurance policies. Coverage on these one-year policies begins June 1, 2007.

16. The company paid $59.5 to employees for wages and benefits relating to the prior-year. Of this, $56 related to accrued payroll and $3.5 to accrued payroll taxes.

17. The company received $167.4 when it borrowed short-term debt.

18. The company repurchased its own stock for $371.2 cash_ Hint: Treasury stock is a contra-equity account, which is why it is bracketed on the balance sheet. Purchasing more treasury stock makes the negative balance grow more negative (that is, larger in absolute terms).

19. The company granted stock options to certain key executives. These options had a fair value of $31.6 and Darden recorded this as an expense ("Selling, general and administrative") and increased the common stock account by that amount. Cash was not affected.

20. During the year executives exercised previously-granted stock options. Darden collected cash of $95.9 from the executives and received a tax refund from the government. These transactions affected a number of accounts. These transactions have already been entered into the spreadsheet in aggregate.

21. The company repaid long-term debt amounting to $153. Hint: Part of this debt was classified as current portion of long-term debt on the May 28, 2006, balance sheet.

22. The company recorded income taxes expense of $153.7 which involved cash of $197.8 and other tax-related asset and liability accounts. This transaction has already been entered into the spreadsheet.

23. The company declared and paid $65.7 of dividends.

24. During the year, Darden Restaurants closed one Red Lobster location and one Olive Garden location. No cash was involved in these closures but the company recorded an impairment charge of $2.4. These restaurant properties had an original cost of $9.2 and accumulated depreciation of $6.8 at the time Darden closed them.

c. Prepare an unadjusted trial balance from the spreadsheet. Hint: the unadjusted balance for Retained Earnings is $1,619.

d. Based on the transactions you recorded in parts b and c, list at least three adjustments or reclassifications that need to be made prior to preparing the final financial statements.

e. Record in the spreadsheet, the following adjustments and reclassifications.

25. By the middle of May 2007, Darden Restaurants had decided to close certain under-performing restaurants. Even though these restaurants have not yet been closed, Darden must record the transactions in the current year. This necessitated three adjustments, as follows:

a) Darden must write down certain assets at the restaurants that will be closed such that the May 27, 2007, balance sheet reports the assets' (lower) fair value. To record this write-down, Darden must reduce asset accounts by the following amounts:

Land, buildings and equipment -               396.0

Accumulated depreciation - 145.8

Other assets (long-term) - 3.9

In addition, Darden must accrue anticipated payroll-related severance costs of $12.5, which will be paid next year. The combined asset write-down and payroll accrual result in a total charge of $266.6, which Darden includes in an account labeled, "Loss from discontinued operations.'

b) During the year, the discontinued restaurants generated profit of $90.9. However, Darden must reclassify this profit as discontinued for financial statement presentation purposes. On the income statement, Darden includes this profit in, "Loss from discontinued operations." Before any adjustments, the sales and expenses are recorded in the following accounts:

Sales - 357.9

Food and beverage expense - 82.8

Restaurant labor expense - 96.2

Restaurant expenses - 53.5

Selling, general and administrative expenses - 34.5

c) For balance sheet presentation purposes, certain remaining assets and liabilities must be reclassified as discontinued assets and liabilities, respectively. Darden labels these discontinued accounts as, "Assets held for sale" and "Liabilities associated with assets held for sale". Before any adjustments, these assets and liabilities are included in the following accounts:

Inventories - 44.6

Land, buildings and equipment - 97.1

Other assets (long-term) - 2.3

Accounts payable - 37.1

Other liabilities (long-term) - 5.2

26. The last payday for the company was May 22, 2007. Restaurant employees had earned, but the company had not yet paid, $28.8 of additional wages through May 27, 2007. Darden senior executives earned performance bonuses of $42.1, which the company will not pay until after 2010. Darden included the executives' compensation in Selling, general and administrative expense.

27. On May 15, 2006, Darden paid the casualty and property insurance premium of $29.9 and recorded the amount as a prepaid expense (a current asset). Coverage on these one-year policies began June 1, 2006. Adjust for this expired insurance premium at May 21, 200/ by recording the insurance expense in "Selling, general and administrative" expense.

28. Depreciation and amortization expense was $200.4 for the fiscal year. Of this, $196.1 pertained to buildings and equipment and $4.3 related to amortization of certain intangible assets, which Darden includes with "Other assets."

29. A review of the company's records revealed that $11.4 of previously deferred (unearned) rent had been earned during the year. Darden includes rent revenue as a reduction to "Selling, general and administrative expense."

30. On May 27, 2007, Darden Restaurant employees took a physical count of inventory. The cost of food and beverages at all continuing locations on that date was $209.6.

31. In May 2007, a consulting firm hired by Darden Restaurants issued a report stating that the "Olive Garden" brand name is worth $360.

f. Construct a statement of earnings for the year ended May 27, 2007. Use the headings from your spreadsheet columns as the account titles.

g. Close all the temporary accounts on the statement of earnings to retained earnings.

h. Prepare the May 27, 2007, balance sheet. Use the headings from your spreadsheet columns as the account titles.

i. For each of the transactions that involve cash, indicate whether the transaction would appear in the "operating," "investing," or "financing" section of the statement of cash flows.

Attachment:- Assignment.rar