Amounts in the question exclude VAT, except where indicated. Excel Leisure Ltd ('Excel') operates four golf driving ranges, two in Johannesburg and one each in Cape Town and Durban. The business strategy has been to acquire land in suitable locations and develop golf driving ranges. Excel then develops family-orientated restaurants on the driving range sites to diversify income streams. Excel has traded well over the past couple of years and is intent on listing on the Alternative Exchange of the Johannesburg Securities Exchange within the next 18 months. The sole shareholder and Chief Executive Officer of Excel, Mr Adamant, is keen to list his business to enable him to sell some shares and to facilitate a share incentive scheme for company employees. The company's financial year end is 31 December. Golf driving range division Driving ranges require significant space and the average size of the properties owned is 75 hectares (or 750 000 square metres). Excel owns all properties from which it operates, and generally targets sites in outlying urban areas. It is hoped that the properties owned will become more valuable in time as residential development occurs around the driving ranges. Revenue has historically been generated from two sources at the driving ranges. First, the public pays for using golf balls (charged per bucket of 50 golf balls). Second, Excel sells beverages and snacks at the golf shops. Excel introduced golf driving range memberships with effect from the 2009 financial year. The key benefits of becoming a member are unlimited usage of the golf driving range (as opposed to paying per bucket of golf balls hit on the range) and a 10% discount on all food and beverage purchases from the restaurant situated on the site. New members are charged a once-off entrance fee of R750. Entrance fees are not refundable in the event of individuals ceasing to be members through voluntary resignation or failure to pay membership fees when due. The membership period is from 1 January to 31 December each year. Annual membership fees in 2009 were R1 200 per member (regardless of whether members join in January or later in a particular year). Membership fees are payable upfront by new members. Members renewing their memberships are required to pay fees on or before 31 January every year. The introduction of membership proved popular with the public and 5 000 memberships in total were sold at the four driving ranges during 2009. Restaurant division The restaurants situated at the golf driving ranges cater for golfers and non-golfers. The décor and facilities are family orientated, and the restaurants serve a wide variety of meals. Restaurants are open seven days a week for breakfast, lunch and dinner.
Excel introduced a customer loyalty programme for non-members of the golf driving ranges in January 2009. Customers electing to join the loyalty programme are issued with loyalty cards (cards with magnetic strips containing individuals' details). Customers are encouraged to present loyalty cards to waitrons when paying for purchases at restaurants and these cards are then swiped at the point-of-sale devices. Loyalty points are captured electronically, recording amounts spent and updating the balance of loyalty points. The loyalty reward is one point for each R10 spent at restaurants which can be redeemed for food and beverages at the restaurants (in full or partial payment of bills). Loyalty points can also be redeemed for buckets of golf balls to be hit on the driving ranges. Finance and administration division The finance and administration division is located at the Durban driving range and is responsible for all the accounting, finance, human resources and administration functions of the driving ranges and restaurants. Divisional statements of comprehensive income are prepared monthly. Statements of financial position are prepared only at the company level and not per division. The trial balance of Excel for the year ended 31 December 2009 is set out below:
EXCEL LEISURE LTD TRIAL BALANCE AT 31 DECEMBER 2009
Notes
Debit
Credit
R'000
R'000
Driving range division
Entrance fees received
1
3 750
Annual membership fee income
1
6 000
Usage of golf balls revenue
2
7 200
Sales of beverages and snacks
2
6 300
Cost of sales: Beverages and snacks
4 200
Salaries and wages
3
3 240
Maintenance of driving ranges
2 160
Replacement of driving range golf balls
800
Other expenses
3
480
Depreciation: Driving range equipment
4
400
Depreciation: Driving range buildings
4
40
Driving range divisional profit
11 930
Restaurant division
Sale of food and beverages
5
43 200
Cost of food and beverages sold
19 640
Salaries and wages
3
5 950
Depreciation: Restaurant equipment
4
1 120
Depreciation: Restaurant buildings
4
360
Linen cleaning and replacement
1 080
Other expenses
3
720
Marketing expenses
6
430
Restaurant divisional profit
13 900
Finance and administration division
Interest income
1 600
Salaries and wages
3
1 800
Bank charges
7
1 100
Depreciation: Finance and administration office equipment
4
125
Electricity
8
820
13
EXCEL LEISURE LTD TRIAL BALANCE AT 31 DECEMBER 2009 (continued)
Notes
Debit
Credit
R'000
R'000
Water
9
780
Advertising
10
560
Other expenses
3
450
Finance and administration divisional loss
4 035
Share capital
1 000
Retained earnings - 1 January 2009
47 000
Trade and other payables
3 800
Land, at cost
11
30 000
Restaurant buildings, at cost
4
18 000
Accumulated depreciation: Restaurant buildings
1 440
Driving range buildings, at cost
4
2 000
Accumulated depreciation: Driving range buildings
160
Driving range equipment, at cost
4
4 000
Accumulated depreciation: Driving range equipment
1 600
Restaurant equipment, at cost
8 960
Accumulated depreciation: Restaurant equipment
4 480
Finance and administration office equipment, at cost
650
Accumulated depreciation: Finance and administration office equipment
350
Inventories
12
1 800
Other current assets
640
Cash and cash equivalents
15 575
85 660
85 660
Notes
1 Entrance and membership fees received are recognised as revenue upon receipt. Members pay entrance fees and membership fees directly into Excel's bank account through Internet banking transfers.
2 Revenue generated by the driving ranges in respect of golf ball usage and sales of beverages and snacks is on a cash basis only.
3 Salaries, wages and other expenses are fixed in nature.
4 Excel records property, plant and equipment at cost and does not revalue assets subsequent to initial recognition. Land is not depreciated and other items of property, plant and equipment are depreciated on a straight-line basis over their expected useful lives. The carrying amounts of property, plant and equipment are equivalent to their tax bases.
5 Customers can pay by credit card or cash at the restaurants. In 2009, 60% of revenue at the restaurants was on a cash basis. Members claimed a total of R480 000 discount at the restaurants during 2009. This discount does not include any effect of the loyalty 14 programme (see note 6). Restaurant revenue has been recorded net of these discounts claimed by members.
6 Marketing expenses represent the direct costs of food and beverages provided, in exchange for the redemption of loyalty points at the restaurants. Excel has not recognised any other entries in respect of loyalty points.
7 Excel pays deposit fees of 1,5% on cash banked (all cash is banked and no cash is used to pay expenses). Banks deduct 2% from all credit card payment transactions in the restaurants and settle amounts owing to Excel net of these transaction fees.
8 The restaurants are responsible for 80% of Excel's electricity consumption and the balance is attributable to the driving ranges. Local authorities charge Excel on the basis of electricity consumption and there is no fixed cost element in monthly billings.
9 The driving ranges are responsible for 90% of Excel's water consumption and the balance is consumed by the restaurant division. Water suppliers charge Excel a variable rate per kilolitre of water used.
10 Excel advertises on local radio stations and through outdoor advertising to promote the driving range facilities and its restaurants.
11 The fair value of land owned by Excel at 31 December 2009 was recently determined as R50 million by an independent property expert.
12 R1 500 000 of inventories are attributable to the restaurant division and R300 000 is attributable to the driving range division.
13 Excel's liability for normal taxation in the 2009 financial year is to be calculated and accrued for following the external audit.
Allocation of finance and administration division expenses The finance and administration division does not allocate expenses directly attributable to the division's activities to the driving range and restaurant divisions.
Marks
(a) Discuss, with reasons, the appropriateness of the recognition and measurement of entrance fees and membership fees adopted by Excel Leisure Ltd. Your discussion need not include any calculations.
(b) Discuss, with reasons, the appropriateness of the recognition and measurement of the customer loyalty programme by Excel Leisure Ltd. Your discussion need not include any calculations.
Presentation marks: Arrangement and layout, clarity of explanation, logical argument and language usage.
2 PART B - to be answered in a separate book
(c) Identify and describe the potential advantages and disadvantages of selling the usage of the golf driving ranges through annual memberships, as introduced in 2009, from the perspective of Excel Leisure Ltd.
(d) Determine the contribution margins and net profits of the driving range and restaurant divisions for the year ended 31 December 2009 using the variable costing approach. Ignore interest and taxation.
(e) Calculate the return on total assets ratio for the driving range division and the restaurant division for the year ended 31 December 2009.
(f) Identify and discuss the arguments for and against allocating the overheads of the finance and administration division to the driving range and restaurant divisions.