2. The profit and loss accounts and balance sheets below refer to two football clubs, for the same financial year.

Arsenal Real Madrid

Balance sheets $000 $000

Fixed assets 3 092 12 783

Current assets 490 203

Current liabilities (2 165) (2 563)

1 417 10 423

Less long-term loans 68 1 743

1 349 8 680

Share capital 363 6 430

Revenue reserves 986 2 250

1 349 8 680

Profit and loss accounts $000 $000

Gate receipts 1 787 1 053

Other match receipts 1 087 633

Less expenses

Wages 1 459 929

Ground expenditure 217 64

Interest 111 293

Other expenses 833 1 287

2 620 2 573

Profit before player transfers 254 (887)

Player purchases 2 007

Player sales 95 1 912 n/a

Profit/(Loss) for year (1 658) (887)

Real Madrid capitalizes the cost of new players acquired on the transfer market and depreciates this cost over the life of their contracts. The fixed asset figures reflect this accounting policy. Arsenal does not capitalize its players but accounts for player acquisition and disposal as an expense or revenue for the particular year.

You are required to consider these two accounting treatments and justify each using the concepts and conventions of accounting. (25 marks)