SHOWBIZ CENTRE CORPORATION

Ryan Lee is a successful chiropractor in southern Ontario. He began his practice fifteen years ago. Recently, Ryan has been looking for an investment to indulge his lifelong interest in sports. He and a group of like-minded people have begun seeking out a minor league sports franchise to purchase. All members of the group are mainly interested in the fun and excitement of owning a sports team, but they do not want to be spending much of their own money beyond the initial amount they pay for the franchise. None of the people in the group has experience in business, accounting or operating a sports franchise. All members of the group will continue in their present occupations after a team is purchased.

The group has begun preliminary discussions with the owner of a hockey franchise in Western Canada, Showbiz Centre Corporation (Showbiz). The owner of the franchise, J. Lowe, says the franchise has been quite successful but she wants to sell Showbiz because of her failing health. Lowe has owned and operated the team since its formation in 1990, when she purchased the franchise rights for the city from the league. In 1999, Lowe built a 6,000 seat arena in the city to house the team. The arena is also used for events such as concerts promoted by Lowe, or by third parties who rent the facility. Revenue is also generated from concessions (food, souvenirs, and parking.)

The group has obtained Showbizs most recent years financial statements. Lowe has indicated that the statements are prepared strictly for tax purposes as there are no other users for the statements. The statements are prepared according to GAAP.

Ryan Lee has come to you for advice on interpreting the financial statements. He has indicated that he does not understand them very well and wants to get some insights into what the statements tell and what they do not tell him. He would also like your advice on what additional accounting and financial information he should request from Lowe before deciding on how much he and his group are prepared to pay for the team and its facility.

Required: Prepare a report to Ryan Lee providing the advice he requested. Be specific and provide full explanations.

Showbiz Centre Corporation

Balance Sheet

As at July 30, 2019

Cash $125,000 Bank Loan $225,000

Accounts Receivable 5,000 Accounts Payable 100,000

Prepaids & Other Current Assets 15,000

Capital Assets 8,450,000

Less: Accumulated Depn (6,337,500)

2,112,500 Common Stock 1,100,000

Franchise Rights 400,000 Retained Earnings 1,232,500

Total Assets $ 2,657,500 Total Liabilities &

Shareholders Equity $ 2,657,500

Showbiz Centre Corporation

Income Statement

For the year ended July 30, 2019

Revenue

Hockey $3,200,000

Concessions & parking 1,200,000

Other events 1,500,000

Other revenue 210,000

$6,110,000

Expenses

Hockey operations 1,760,000

Concessions & parking 540,000

Other events 1,125,000

Building costs 2,550,000

$5,975,000

Expansion Fee Revenue 250,000

Income tax expense 77,000

Net Income $ 308,000

Showbiz Corporation

Notes to the Financial Statements

1. Fixed assets include the arena and land, along with the equipment necessary to operate the arena and hockey team.
2. The Hockey Team Franchise account is the cost of the franchise. The amount is not amortized.
3. Hockey revenue includes $355,000 for the radio broadcast rights to the teams home games. The radio network is also owned separately by Lowe and her family.
4. Revenue is recognized for hockey games and other events when the event occurs.
5. During fiscal 2019 the league expanded by two teams. Showbizs share of the expansion fees is $250,000
6. Showbiz has a working arrangement with a major league professional hockey team. The major league team supplies players and pays their salaries, but is entitled to sue those players at its discretion. Approximately 60% of the players used by the Showbiz are supplied by the major league team. The contract with the major league team expires in two years.
7. The bank loan is personally guaranteed by Lowe and is secured against company assets as well as Lowes personal assets.
8. Showbiz has an outstanding guaranteed contract with a player who had to stop playing because of an injury. The 2019 income statement includes the $100,000 payment that was made to the player in the year. Payments have to be made in 2020 and 2021, after which the contract expires and no further payments are required.

Additional directions for responding:

• Look at the financial statements and think about the information they provide and compare that with the information Ryan wants and needs. Go through the financial statements and notes line by line and assess the relevance of the information given versus what is needed.
• Consider the following:
  • Who is your client and what are their goals?
  • What information is needed for your client to make the necessary decisions?
  • What information is provided to your client in the financial statements? Is the information in the financial statements what is needed? Is anything missing from the information that is provided? (Consider information that may be needed to give insight into the future of the organization.)

1) After looking at the financial statements, provide at least 3 issues that will need to be addressed. (Just identify the issue and why it is an issue.

2) List 3 other pieces of information your client might want in making the decision.