please see attached and please answer 1-5

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Introduction Ciclon de Alicante (Ciclon) 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, Cicln entered into a number of transactions (detailed below) that could alter forever the visibility of the team and its competitiveness within the league. Ciclon's managers were concerned about how they should communicate the recent events to the capital markets. Ciclon was traded on the Spanish Stock Exchange, but it was planning to tap into the US. capital markets, so the firm favored accounting treatments that were consistent with US. GAAP. However, Ciclon's accountants thought they had enough exibility 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 Ciclon's stadium grounds into prilne real estate. Thus, on January 1, 2003 Ciclon 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 SA. had already built (construction ended on December 31, 2002) and a cash payment of $100 million. Miguel SA. 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 Ciclon on January 1, 2003. At the time the new stadium was transferred to Ciclon, the estimated market value of the associated land was $12 million. The book value of Cicln'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. The Acquisition of New Players Ciclon'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, Cicln's management acquired the star Spanish forward, David Halcon, on January 1, 2003. The details of the Halcn transaction were as follows: 0 Ciclon agreed to pay Halcn'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). o Halcon would receive $4 million for each of the five years he agreed to play with Ciclon. o Ciclon had the option to extend its contract with Halcon for one additional year for the same annual payment of $4 million. Sale of Box Seats Taking advantage of the media frenzy caused by the acquisition of a star player and the team management changes, Ciclon'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. The T-shirt Business As part of the transformation into a modern, professionally run, sports business organization, Cicln 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 tshirts 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 tshjrts. Under Ciclon's new plan, tshirts were sold at the team's store. On an ongoing basis, Cicln planned to make scheduled purchases of replacement t-shirt inventory from its supplier for delivery on January 1 and July 1 of each year. Ciclon made an initial inventory purchase of 10,000 new design t-shirts costmg $15 per shirt on December 31, 2002. The following summarizes the purchasing and selling activity related to the tshirt inventory during 2003. Date Transaction December 31, 2002 Beginning Inventory10,000 shirts @ $15 January 1, 2003 Purchased and received 1,000 shirts @ $18 Sales for the first half of the year Sold 8,000 shirts @ $25 July 31, 2003 Purchased and received 7,000 shirts @$20 Sales during the second half of the year Sold 6,000 shirts @$26 In the future, Cicln anticipated t-shirt costs would continue to rise in line with the general inflation rate in consumer prices. In addition to the other initiatives Cicln engaged in during 2003, Ciclon wanted its t-shirt styles to reect its revamped marketing plans. Hence, Cicln anticipated more frequently updating its tshirt designs so that the tshirts 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. The Lease of the Parking Garage To prevent excessive traffic jams, the Alicante Tourist Board suggested Cicln lease or acquire a parking garage recently built in the proximity of the stadium. The fair market acquisition cost of the garage was $6.5 million, but Ciclon agreed to lease it for 10 years for an annual payment of $1 million paid each December 31 (the first payment to be made in December 2003). The expected useful life of the building was 20 years, when major renovations would be needed to keep the building in usable condition. Ciclon's marginal borrowing rate was 10%. They signed the lease contract on January 1, 2003. Conclusion All these events represented a signicant change for Cicln. The challenge for Cicln's accountants was to choose the accounting methods that best communicated the new nature of the business. Please Answer Questions (1)(5): Your answers should clearly indicate your recommendations and support for them. If alternative accounting treatments exist, briey describe them and your reasons for rejecting them. In your write- up, discuss the accounting concepts that seem to be relevant to your responses. Ciclon has a December 31 fiscal year end. Assume throughout your responses that all soccer games for a given season, including championship games, are played within the calendar year. Ignore any potential tax implications. Present value factors are provided in Exhibit 1. 1. (12 points) 2. (16 points) 3. (9 points) What is the impact of the sale of the stadium transaction on Ciclon's 2003 Income Statement and Statement of Cash Flows (under the Indirect Method), and on its Balance Sheet for the year ended on December 31", 2003? Be specic. 2a. 2b. 2c. 2d. What would be the impact of the Halcn transaction on Ciclon's 2003 Income Statement and Statement of Cash Flows (under the Indirect Method), and on its Balance Sheet for the year ended on December 31", 2003, assuming the transfer payments are recorded as an asset? What would be the impact of the Halcn transaction on Ciclon's 2003 Income Statement and Statement of Cash Flows (under the Indirect Method), and on its Balance Sheet for the year ended on December 31", 2003, assuming the transfer payments are recorded as an expense? What accounting treatment should Cicln give to the transfer payments? Justify your answer. Assume the contract for Halcon includes a clause specifying an additional payment of $1.5 million to Halcon's previous team each time Cicln qualifies for the European championship in the next 3 years. How would you account for this clause in the 2003 nancial statements? Note that Cicln has never qualified for this championship; however, management is optimistic of Ciclon's chances of doing so in the future given the team's recent player acquisitions. How would you account on December 31", 2002 and December 31'", 2003 for the amounts Cicln received from the sale of box seats on December 31'", 2002? Be explicit about the timing and amounts for the $50,000 initial payment and the $25,000 payment for the season tickets. 4. (9 points) 5. (9 points) $23,UUU payment tor the season IICKEtS. For all the inventory questions please ignore potential tax effects 4a. Using the periodic LIFO method, calculate Ciclon's t-shirt inventory on December 31, 2003 and the cost of goods sold during 2003. 4b. Using the periodic FIFO method, calculate Ciclon's tshirt inventory on December 31, 2003 and the cost of goods sold during 2003. 4c. Which inventory valuation method would you recommend to Ciclon? Why? What impact does the proposed plan of tshirt design renewal have on the appropriate accounting for Ciclon's inventory? If Cicln were to follow U.S. accounting rules to account for the lease of the parking garage, what would be the impact of the lease on Ciclon's 2003 Income Statement and Statement of Cash Flows (under the Indirect Method), and on its Balance Sheet for the year ended on December 31, 2003