Identifi cation of Errors in Financial Statements and Preparation of Revised Statements Lakeside Slammers Inc. is a minor league baseball organization that has just completed its fi rst season. You and three other investors organized the corporation; each put up

$10,000 in cash for shares of capital stock. Because you live out of state, you have not been actively involved in the daily affairs of the club. However, you are thrilled to receive a dividend check for $10,000 at the end of the season—an amount equal to your original investment. Included with the check are the following fi nancial statements, along with supporting explanations:

Lakeside Slammers Inc.

Income Statement For the Year Ended December 31, 2010 Revenues:

Single-game ticket revenue $420,000 Season ticket revenue 140,000 Concessions revenue 280,000 Advertising revenue 100,000 $940,000 Expenses:

Cost of concessions sold $110,000 Salary expense—players 225,000 Salary and wage expense—staff 150,000 Rent expense 210,000 695,000 Net income $245,000 Lakeside Slammers Inc.

Statement of Retained Earnings For the Year Ended December 31, 2010 Beginning balance, January 1, 2010 $ 0 Add: Net income for 2010 245,000 Deduct: Cash dividends paid in 2010 (40,000)

Ending balance, December 31, 2010 $205,000 Lakeside Slammers Inc.

Balance Sheet December 31, 2010 Assets Liabilities and Stockholders’ Equity Cash $ 5,000 Notes payable $ 50,000 Accounts receivable: Capital stock 40,000 Season tickets 140,000 Additional owners’ capital 80,000 Advertisers 100,000 Parent club’s equity 125,000 Auxiliary assets 80,000 Retained earnings 205,000 Equipment 50,000 Player contracts 125,000 Total liabilities and Total assets $500,000 stockholders’ equity $500,000 Additional information:

a. Single-game tickets sold for $4 per game. The team averaged 1,500 fans per game.
With 70 home games  $4 per game  1,500 fans, single-game ticket revenue amounted to $420,000.

b. No season tickets were sold during the fi rst season. During the last three months of 2010, however, an aggressive sales campaign resulted in the sale of 500 season tickets for the 2011 season. Therefore, the controller (who is also one of the owners)
chose to record an Account Receivable—Season Tickets and corresponding revenue for 500 tickets  $4 per game  70 games, or $140,000.

c. Advertising revenue of $100,000 resulted from the sale of the 40 signs on the outfi eld wall at $2,500 each for the season. However, none of the advertisers have paid their bills yet (thus, an account receivable of $100,000 on the balance sheet)
because the contract with Lakeside required payment only if the team averaged 2,000 fans per game during the 2010 season. The controller believes that the advertisers will be sympathetic to the diffi culties of starting a new franchise and will be willing to overlook the slight defi ciency in the attendance requirement.

d. Lakeside has a working agreement with one of the major league franchises. The minor league team is required to pay $5,000 every year to the major league team for each of the 25 players on its roster. The controller believes that each of the players is an asset to the organization and has therefore recorded $5,000  25, or $125,000, as an asset called Player Contracts. The item on the right side of the balance sheet entitled Parent Club’s Equity is the amount owed to the major league team by February 1, 2011, as payment for the players for the 2010 season.

e. In addition to the cost described in item (d), Lakeside directly pays each of its 25 players a $9,000 salary for the season. This amount—$225,000—has already been paid for the 2010 season and is reported on the income statement.

f. The items on the balance sheet entitled Auxiliary Assets on the left side and Additional Owners’ Capital on the right side represent the value of the controller’s personal residence. She has a mortgage with the bank for the full value of the house.
g. The $50,000 note payable resulted from a loan that was taken out at the beginning of the year to fi nance the purchase of bats, balls, uniforms, lawn mowers, and other miscellaneous supplies needed to operate the team. (Equipment is reported as an asset for the same amount.) The loan, with interest, is due on April 15, 2011. Even though the team had a very successful fi rst year, Lakeside is a little short of cash at the end of 2010 and has asked the bank for a three-month extension of the loan.
The controller reasons, “By the due date of April 15, 2011, the cash due from the new season ticket holders will be available, things will be cleared up with the advertisers, and the loan can be easily repaid.”
Required 1. Identify any errors you think the controller has made in preparing the fi nancial statements.
2. On the basis of your answer in part (1), prepare a revised income statement, statement of retained earnings, and balance sheet.
3. On the basis of your revised fi nancial statements, identify any ethical dilemma you now face. Does the information regarding the season ticket revenue provide reliable information to an outsider? Does the $100,000 advertising revenue on the income statement represent the underlying economic reality of the transaction? Do you have a responsibility to share these revisions with the other three owners? What is your responsibility to the bank?
4. Using Exhibit 1-9 and the related text as your guide, analyze the key elements in the situation and answer the following questions. Support your answers by explaining your reasoning.

a. Who may benefi t or be harmed?

b. How are they likely to benefi t or be harmed?

c. What rights or claims may be violated?

d. What specifi c interests are in confl ict?

e. What are your responsibilities and obligations?

f. Do you believe the information provided by the organization is relevant, is reliable, accurately represents what it claims to report, and is unbiased?AppendixLO1