Please be thorough (but concise) in your response to each question. Be sure to support your decisions and explain any specific issues that occurred in your analysis. Ciclón de Alicante (Ciclón’s marginal borrowing rateis 10%) Introduction Ciclón de Alicante (Ciclón) was a mediocre soccer team in the Spanish Championship League. Located in the small provincial town of Alicante (Spain), the team’s budget could not compete with that of the major city clubs. Recently, Ciclón entered into a number of transactions (detailed below) that could alter forever the visibility of the team and its competitiveness within the league. Ciclón’s managers were concerned about how they should communicate the recent events to the capital markets. Ciclón was traded on the Spanish Stock Exchange, but it was planning to tap into the U.S. capital markets, so the firm favored accounting treatments that were consistent with U.S. GAAP. However, Ciclón’s accountants thought they had enough flexibility to choose the accounting method that best described the nature of the business. The Sale of the Stadium Continuing regional development, especially within Alicante’s tourism industry, had transformed Ciclón’s stadium grounds into prime real estate. Thus, on January 1, 2003 Ciclón sold their old stadium and its associated real estate to Miguel S.A., a real estate development company, in exchange for a new stadium that Miguel S.A. had already built (construction ended on December 31, 2002) and a cash payment of $100 million. Miguel S.A. had acquired the land for the new stadium earlier for $7 million; the cost of constructing the stadium was an additional $20 million. The $20 million approximates the fair value of the stadium structure. Both the $100 million cash and the stadium were transferred to Ciclón on January 1, 2003. At the time the new stadium was transferred to Ciclón, the estimated market value of the associated land was $12 million. The book value of Ciclón’s old stadium and its associated real estate was $1 million.1 As of January 1, 2003, the expected useful life of the new stadium was 40 years. Under Spanish law the club would be responsible for demolishing the stadium at the end of its useful life. The estimated demolition cost was $5 million. 1 $5 million gross book value of the stadium less $4 million accumulated depreciation. The team’s original purchase price of the stadium’s real estate was $1 million. It was included in the $5 million of gross book value. Question: . 1) How would you account for the sale/exchange? Explain your classification of the transaction – the actual journal entry is required later . 2) Explain your reasoning for your decision in #1 above in detail. Be specific and go though the steps in your decision/classification process. . 3) What value should you use to record the new stadium? . 4) How do you calculate gain/loss? Is the gain/loss recognized? Why/why not? . 5) What is the proper journal entry to account for the sale/exchange? . 6) Under Spanish law, Ciclón has to demolish the newly acquired stadium at the end of its useful life (currently estimated at 40 years). Estimated demolition costs are $5 million. . i) Should this be recorded today? Why or why not? . ii) If it should be recorded, what amount should you record? What account(s) would be affected? If required, what is the proper journal entry? . 7) Year end adjusting entries: . i) Depreciation – assume straight-line method, 40 year useful life, $0 salvage value – how much is the annual depreciation? . ii) Why do I assume there is no salvage value? . iii) What is the year-end journal entry for depreciation on the stadium account for year 1? . iv) Do you need any additional year-end adjusting entries? (Hint: Did you record anything in transaction #6 that would need adjusting at year- end?) . 8) What is the impact of the above transactions on the: i) Balance sheet - be specific using the following chart: Account name Section of balance sheet $Amount Increase/Decrease ii) Income statement – be specific using the following chart: Account name Section of the income stmt $Amount Increase/Decrease iii) Statement of cash flows – be specific using the following chart: Operating Section: Operating Section: Description of Item $Amount Inflow/Outflow Investing Section: Description of Item $Amount Inflow/Outflow Financing Section: Description of Item $Amount Inflow/Outflow The Acquisition of New Players Ciclón’s general manager decided to invest part of the proceeds of the sale in transforming the team into one of the top teams in the Spanish Championship League. This would include not only acquiring new players, including one with high media visibility, but also changing the management style of the team. Essentially all European soccer league teams could “buy” or “sell” players to other teams in exchange for a transfer payment to the acquired player’s club, provided the player agreed to the transaction. A transfer payment was the sole compensation that the selling team received from the acquiring team for releasing a player from his existing contract obligations. With the money received from the sale of the stadium, Ciclón’s management acquired the star Spanish forward, David Halcón, on January 1, 2003. The details of the Halcón transaction were as follows: . Ciclón agreed to pay Halcón’s previous team a total of $25 million in four payments, the first for $10 million at the signing of the contract and three annual payments of $5 million each (payable at the end of 2003, 2004 and 2005). . Halcón would receive $4 million for each of the five years he agreed to play with Ciclón. . Ciclón had the option to extend its contract with Halcón for one additional year for the same annual payment of $4 million. Question: . 1) Think about what is happening in these transactions. In particular, how would the transfer payments be booked (impact on assets/expenses, liabilities, etc.)? . 2) Prepare the journal entry to record the impact of the $25 million transfer payments as an asset (when paid) i) What is the impact of treating the transfer payments as an asset on the income statement, balance sheet, and statement of cash flows? 3) Prepare the journal entry to record the impact of the $25 million transfer payments as an expense (when paid) i) What is the impact of treating the transfer payments as an expense on the income statement, balance sheet, and statement of cash flows? . 4) Which accounting treatment (between 1 and 2 above) would you recommend? Why? Present two potential reasons for considering each treatment. . 5) How would you treat Halcón’s contract ($4 million for each of five years)? Do you need to book anything today? . 6) How would you treat the optional contract extension for Halcón for one additional year? Does anything need to be recorded today? . 7) Answer question 2d on page 4 of the case materials. Sale of Box Seats Taking advantage of the media frenzy caused by the acquisition of a star player and the team management changes, Ciclón’s management decided to market aggressively the 10 corporate boxes in the stadium. The contracts stipulated an initial payment of $50,000 that gave the acquirer the right to buy annually season tickets for the box. This initial payment was nonrefundable. Beyond the initial payment, each year, the box holder needed to make an annual payment of $25,000 in order to actually receive the season tickets. If the box holder decided not to buy the season ticket, the contract established that they would lose the right to the box and the right to buy season tickets for their box; the box would be then offered for sale to other parties. The experience of other teams in the league suggested that, on average, box holders bought season tickets for 15 years before waiving their right to buy them and to use the box. The sale was a huge success, with all boxes sold and season tickets paid for on December 31, 2002. Question: 1) Record the journal entry necessary on 12/31/02 for the sale of the box seats 2) Record the journal entry necessary on 12/31/03 for the sale of the box seats (one year later) 3) Record the journal entry necessary on 12/31/02 for the sale of the season tickets 4) Record the journal entry necessary on 12/31/03 for the sale of the season tickets, assuming all games have been played for the season The T-shirt Business As part of the transformation into a modern, professionally run, sports business organization, Ciclón planned to step up its effort to commercialize team souvenirs. One idea was to sell thousands of team shirts every year. The marketing plan focused on the sale of t-shirts of various makes and styles bearing the team logo. Previously, the team had licensed a local merchant to sell its t-shirts. This merchant had maintained its own inventory of t-shirts. Under Ciclón’s new plan, t-shirts were sold at the team’s store. On an ongoing basis, Ciclón planned to make scheduled purchases of replacement t-shirt inventory from its supplier for delivery on January 1 and July 1 of each year. Ciclón made an initial inventory purchase of 10,000 new design t-shirts costing $15 per shirt on December 31, 2002. The following summarizes the purchasing and selling activity related to the t-shirt inventory during 2003. In the future, Ciclón anticipated t-shirt costs would continue to rise in line with the general inflation rate in consumer prices. In addition to the other initiatives Ciclón engaged in during 2003, Ciclón wanted its t-shirt styles to reflect its revamped marketing plans. Hence, Ciclón anticipated more frequently updating its t-shirt designs so that the t-shirts currently sold to the public would coincide with current print and billboard campaigns. Under this new plan, employees of the team store would be encouraged to reinforce the current marketing campaign by “pushing” the more recent shipments of t-shirts to store patrons. Question: For all the inventory questions please ignore potential tax effects 4a. Using the periodic LIFO method, calculate Ciclón’s t-shirt inventory on December 31, 2003 and the cost of goods sold during 2003. 4b. Using the periodic FIFO method, calculate Ciclón’s t-shirt inventory on December 31, 2003 and the cost of goods sold during 2003. 4c. Which inventory valuation method would you recommend to Ciclón? Why? What impact does the proposed plan of t-shirt design renewal have on the appropriate accounting for Ciclón’s inventory?
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