Tesco Exits South Korea

Tesco was founded in 1919 by Jack Cohen (Cohen), who invested his serviceman’s gratuity of £30 in a grocery stall. The first private label product introduced by Cohen was Tesco Tea. The name Tesco was a combination of the initials of the tea supplier TE Stockwell, and the first two letters of Cohen’s name. Tesco opened its first store in 1929 in Edgware, London. In 1947, Tesco Stores (Holdings) Limited was floated on the Stock Exchange with a share price of 25 pence and the first supermarket was opened in 1956 in Maldon, Essex, England. The first superstore was opened in 1968 in Crawley, West Sussex. In the 1960s, Tesco went on an expansion spree and acquired several store chains. The Retail Price Maintenance (RPM) Act in Britain prohibited large retailers from pricing goods below a price agreed upon by the suppliers. To overcome this obstacle to price reduction, Tesco introduced trading stamps. These were given to customers when they purchased products and could be traded for cash or other gifts. RPM was abolished in 1964, and from then on, Tesco was able to offer competitively priced products to its customers in a more direct manner. The first Tesco superstore, with an area of 90,000 square feet, was opened in 1967.

TESCO’S GLOBAL EXPANSION
Tesco’s global expansion began in 1979, when it entered Ireland by acquiring a 51% equity stake in ‘3 Guys stores’. In 1986, Tesco divested itself of the stores after it found that it could not sustain its operations in the country as customers were rejecting the British products that it sold. During the late 1980s and the early 1990s, Tesco examined the options available in the US and European countries after the British government introduced new regulations on ‘out-of-town’ stores. In December 1992, Tesco entered France by acquiring an 85% equity holding in Catteau supermarkets, which operated under the Cedico brand with 72 superstores, 7 hypermarkets, and 24 small stores. However, Tesco failed to sustain itself in the market due to competition from French retailers like Carrefour and Promodès. In 1995, a law was passed in France which prohibited the opening of new large retail stores. Moreover, the company failed to adapt its products to suit local tastes and lost market share. In 1996, in spite of investing an additional £ 300 million in France, sales in the country grew by a mere 1%. In the year 1997, Tesco sold its operations in France to Prom odes.

TESCO IN SOUTH KOREA
In the early 1990s, there was a growing demand from consumers in South Korea for a modern shopping experience owing to rapid economic growth and increasing disposable incomes. The government had adopted protectionist policies and the retail sector was not open for foreign direct investment (FDI). Tesco

entered South Korea in 1999 through a joint venture with Homeplus, a unit of the country’s biggest business group Samsung Corporation (Samsung). In the next few years, Tesco became the most successful international retailer in the country. Its success was attributed to its ability to localize its products and stores to appeal to the South Korean consumers; its operating through local management; and its strong presence through different store formats. South Korea went on to become Tesco’s most successful international business in terms of revenue. As of 2014, it operated d 140 hypermarkets, 609 supermarkets, and 326 convenience stores.

TESCO’S STRATEGIES IN SOUTH KOREA
Immediately after entering into the joint venture, Tesco went about upgrading the store layouts. The stores were modified to resemble department stores, which were spacious and clean. Tesco’s stores in Korea did not resemble its stores in the UK or in other European locations like Hungary, Poland, the Czech Republic, and Ireland.

CHANGES IN THE OPERATING ENVIRONMENT
In October 2012, when Tesco posted its first fall in profits in 20 years, the company also announced that its profits in South Korea would take a £ 100 million hit due to the "retail market development bill” that had been passed by the government in November 2010. However, changes in the operating environment in South Korea due to new laws that were enforced beginning 2010 to protect small retailers and merchants started to impact Tesco and other large retailers. These laws placed restrictions on the locations where supermarkets could be opened. The Distribution Industry Development Act passed in 2012 imposed restrictions on the time for which the stores could remain open and also specified that on two weekends every month the large retail stores should be closed. As most Koreans shopped during the weekends, these restrictions started to impact Tesco, which made losses in 2015. Under the impact of the global recession, the private spending in South Korea fell. Another factor that impacted Tesco in South Korea was its UK business, which was not doing well.

TESCO’S EXIT FROM SOUTH KOREA
After several months of speculation, Tesco sold its South Korean stores to Asian private equity firm MBK Partners for £4.2 billion on September 07, 2015. On September 07, 2015, Tesco PLC (Tesco), a British multinational grocery and general merchandise retailer, announced that it had sold its South Korean business, operated under the name Homeplus, for £4.2 billion to a consortium of companies led by MBK Partners, a South Korean buyout firm. The consortium included Canada Pension Plan Investment Board, Public Sector Pension Investment Board, and Temasek Holdings (Private) Limited.

Case study question
The extract above mentions changes in operating environment in which Tesco functions.

Discuss in this context, the nuances of a Task environment.

Structure and makeup of Congress in 1789 and in 2020

Bramble Inc. reported the following accounting income (loss) and related tax rates during the years 2015 to 2021:

Accounting income (loss) and taxable income (loss) were the same for all years since Bramble began business. The tax rates from 2018 to 2021 were enacted in 2018.

Assume Bramble Inc. follows ASPE for all parts of this question, except when asked about the effect of reporting under IFRS in part (b).

Prepare the journal entries to record income taxes for the years 2019 to 2021. Assume that Bramble uses the carryback provision where possible and expects to realize the benefits of any loss carryforward in the year that immediately follows the loss year. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

Show how the bottom portion of the income statement would be reported in 2019, beginning with “Loss before income tax.” (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)

Show how the bottom portion of the income statement would be reported in 2020, starting with “Income before income tax.” (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)

Prepare the journa

Assume now that Bramble uses a valuation allowance account along with its Future Tax Asset account. Identify which entries in the previous part of the question would differ and prepare them. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)


Indicate how the bottom portion of the income statements for 2019 and 2020 would be reported. Assume that Bramble uses the carryback provision where possible but is uncertain if it will realize the benefits of any loss carryforward in the future. Bramble does not use a valuation allowance. (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)l entries for the years 2019 to 2021 to record income taxes, assuming that Bramble uses the carryback provision where possible but is uncertain if it will realize the benefits of any loss carryforward in the future. Bramble does not use a valuation allowance. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

A 30-year old wants to make a saving plan to meet the following three goals:

§  First Goal: To save $150,000 in 5 years for the down payment to purchase a house, which is estimated to be $600,000. At that time, she will borrow the rest by taking a 30-year fixed rate mortgage at an APR of 5.5% for the house purchase.

§  Second Goal: To retire in 35 years, that is, when she is 65. By that time the money she saves during the 35 years, is able to generate $18,000 each month for 20 years of retirement living. Assume she will withdraw the $18,000 at the beginning of each month.

§  Third Goal: To leave $1,000,000 to her children, which is expected to occur at the end of her 20-year retirement life.

She thinks she can save $3000 at the end of each month in the following 5 years. Then she will need to withdraw $150,000 from her account for the down payment to buy a house. After then, she will continue saving $X dollars each month while paying the monthly mortgage payment until she retires at the age 65. She will pay off the mortgage loan when she retires.

Assume she can earn 10% EAR before she retires and 6.5% EAR on her money after she retires.

Q4. What is the monthly interest rate she can earn before she retires ?

Q5. What is the monthly interest rate she can earn after she retires ?

Q6. What is the total saving required on the day she retires to support her Goal I and Goal II ?

Q7. After withdrawing the $150,000 for down payment five years later, how much is left in her account?

Q8. To achieve the three goals, how much must she save at the end of each MONTH after she purchases the house until she retires?

Q9. What is her monthly mortgage payment?

Q10. If the inflation rate is 3% each year, what is the purchasing power of $18,000 after 35 years (the time when she retires)?

Schultz Electronics manufactures two ultra high-definition television models: the Royale which sells for $1,480, and a new model, the Majestic, which sells for $1,320. The production cost computed per unit under traditional costing for each model in 2020 was as follows.

In 2020, Schultz manufactured 25,000 units of the Royale and 10,000 units of the Majestic. The overhead rate of $41 per direct labor hour was determined by dividing total estimated manufacturing overhead of $8,202,400 by the total direct labor hours (200,000) for the two models.

Under traditional costing, the gross profit on the models was Royale $494 ($1,480 – $986) and Majestic $595 ($1,320 – $725). Because of this difference, management is considering phasing out the Royale model and increasing the production of the Majestic model.

Before finalizing its decision, management asks Schultz’s controller to prepare an analysis using activity-based costing (ABC). The controller accumulates the following information about overhead for the year ended December 31, 2020.

The cost drivers used for each product were:

Assign the total 2020 manufacturing overhead costs to the two products using activity-based costing (ABC) and determine the overhead cost per unit. (Round cost per unit to 2 decimal places, e.g. 12.25.)

eTextbook and Media

Calculate cost per unit of each model using ABC costing. (Round answers to 2 decimal places, e.g. 12.25.)

eTextbook and Media

Calculate gross profit of each model using ABC costing. (Round answers to 2 decimal places, e.g. 12.25.)

Each change occurs during 2021 before any adjusting entries or closing entries were prepared. Assume the tax rate for each company is 25% in all years. Any tax effects should be adjusted through the deferred tax liability account.

1. Fleming Home Products introduced a new line of commercial awnings in 2020 that carry a one-year warranty against manufacturer’s defects. Based on industry experience, warranty costs were expected to approximate 2% of sales. Sales of the awnings in 2020 were $2,900,000. Accordingly, warranty expense and a warranty liability of $58,000 were recorded in 2020. In late 2021, the company’s claims experience was evaluated, and it was determined that claims were far fewer than expected: 1% of sales rather than 2%. Sales of the awnings in 2021 were $3,400,000, and warranty expenditures in 2021 totaled $77,350.
2. On December 30, 2017, Rival Industries acquired its office building at a cost of $880,000. It was depreciated on a straight-line basis assuming a useful life of 40 years and no salvage value. However, plans were finalized in 2021 to relocate the company headquarters at the end of 2025. The vacated office building will have a salvage value at that time of $640,000.
3. Hobbs-Barto Merchandising, Inc., changed inventory cost methods to LIFO from FIFO at the end of 2021 for both financial statement and income tax purposes. Under FIFO, the inventory at January 1, 2021, is $630,000.
4. At the beginning of 2018, the Hoffman Group purchased office equipment at a cost of $264,000. Its useful life was estimated to be 10 years with no salvage value. The equipment was depreciated by the sum-of-the-years’-digits method. On January 1, 2021, the company changed to the straight-line method.
5. In November 2019, the State of Minnesota filed suit against Huggins Manufacturing Company, seeking penalties for violations of clean air laws. When the financial statements were issued in 2020, Huggins had not reached a settlement with state authorities, but legal counsel advised Huggins that it was probable the company would have to pay $140,000 in penalties. Accordingly, the following entry was recorded:

Late in 2021, a settlement was reached with state authorities to pay a total of $284,000 in penalties.

6. At the beginning of 2021, Jantzen Specialties, which uses the sum-of-the-years’-digits method, changed to the straight-line method for newly acquired buildings and equipment. The change increased current year net earnings by $379,000.

Required:
For each situation:
1. Identify the type of change.
2. Prepare any journal entry necessary as a direct result of the change, as well as any adjusting entry for 2021 related to the situation described.
  

2. Cost-Volume-Profit (CVP)                                                                                                               40 points

a. Assignment Question on Cost Volume Profit (CVP)

MMC Nutri Company is a small family fast food restaurant that opened in 2015, serving tropical cuisine to its mainly Afro-American, Asian and African customers. Because of its hot ingredients, few others patronize the food.

This business serves its popular dish Jollof rice, fish or meat stew, and rice flour porridge, as a meal for $9 a serving. Its variable cost per serving is $4.10 and its monthly fixed cost is $4,600 a month. On average, the business sells 60 servings a day, opened every day except Sunday. The highly religious owner takes Sunday off, as a rest day.

During this 2020 year of COVID-19 pandemic, average sales has dropped significantly. In June of this year, the federal government gave a lump sum financial assistance of $10,000 to the business, during a six weeks lockdown. Since then, current sales has dropped by 60% of its pre-COVID level, despite the introduction of take-away opportunity. The business optimistically estimates that sales will slowly increase to a maximum of 80% of pre-COVID level, for the rest of this year.

The owner is considering closing the business, due to uncertainty and depletion of personal savings to finance its operations, and has commissioned you to give advice, based on your knowledge of accounting.

The business is also exploring an available option of a $6,000 investment in machinery that will be used for 5 years and will reduce variable cost by $0.30 a unit. Sales price/unit will not change.

What will be your overall advice to this owner? Justify each option with analysis based on CVP.            

(Points will be awarded for trend of thought and the application of CVP principles. There is no one answer.) 30 points

b. Assignment on Plant-wide Overhead Absorption

Basic Construction Company won a bid to build a gym between January and March 2020. The actual manufacturing overhead for the completed construction was $128,610. On December, 2019, before the start of the construction, the company decided to set an annual overhead rate of $875,000 for all jobs during 2020, to be absorbed by direct labor hours. The actual direct labor hours used for this job was 49,000, and the direct machine hours used was 12,700. The annual direct labor hours estimated for 2020 by the company was 350,000 DLH. Provided there is over or under absorbed overhead, considered not significant, prepare the journal entry to close the manufacturing overhead account, at the end of the contract.                                                                                                                                             10 points