The Sale of the Stadium

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 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 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 Ciclons 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.

($5 million gross book value of the stadium less $4 million accumulated depreciation. The teams original purchase price of the stadiums real estate was $1 million. It was included in the $5 million of gross book value. )

The Acquisition of New Players

Essentially all European soccer league teams could buy or sell players to other teams in exchange for a transfer payment to the acquired players 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, Ciclons management acquired the star Spanish forward, David Halcon, on January 1, 2003.

The details of the Halcon transaction were as follows:

1. Ciclon agreed to pay Halcons 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).

2. Halcon would receive $4 million for each of the five years he agreed to play with Ciclon.

3. 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, Ciclons 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

Under Ciclons new plan, t-shirts were sold at the teams store. On an ongoing basis, Ciclon 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 costing $15 per shirt on December 31, 2002. The following summarizes the purchasing and selling activity related to the t-shirt 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, Ciclon anticipated t-shirt costs would continue to rise in line with the general inflation rate in consumer prices.

In addition to the other initiatives Ciclon engaged in during 2003, Ciclon wanted its t-shirt styles to reflect its revamped marketing plans. Hence, Ciclon 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.

The Lease of the Parking Garage

To prevent excessive traffic jams, the Alicante Tourist Board suggested Ciclon 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. Ciclons marginal borrowing rate was 10%. They signed the lease contract on January 1, 2003.

Questions:

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. What is the impact of the sale of the stadium transaction on Ciclons 2003 Income Statement, Statement of Cash Flows (under the Indirect Method), and on its Balance Sheet for the year ended on December 31st, 2003? Be specific.

2.

2a. What would be the impact of the Halcon transaction on Ciclons 2003 Income Statement and Statement of Cash Flows (under the Indirect Method), and on its Balance Sheet for the year ended on December 31st, 2003, assuming the transfer payments are recorded as an asset?

2b. What would be the impact of the Halcon transaction on Ciclons 2003 Income Statement and Statement of Cash Flows (under the Indirect Method), and on its Balance Sheet for the year ended on December 31st, 2003, assuming the transfer payments are recorded as an expense?

2c. What accounting treatment should Ciclon give to the transfer payments? Justify your answer.

2d. Assume the contract for Halcon includes a clause specifying an additional payment of $1.5 million to Halcons previous team each time Ciclon qualifies for the European championship in the next 3 years. How would you account for this clause in the 2003 financial statements? Note that Ciclon has never qualified for this championship; however, management is optimistic of Ciclons chances of doing so in the future given the teams recent player acquisitions.

3. How would you account on December 31st, 2002 and December 31st, 2003 for the amounts Ciclon received from the sale of box seats on December 31st, 2002? Be explicit about the timing and amounts for the $50,000 initial payment and the $25,000 payment for the season tickets.

4. For all the inventory questions please ignore potential tax effects

4a. Using the periodic LIFO method, calculate Ciclons t-shirt inventory on December 31, 2003 and the cost of goods sold during 2003.

4b. Using the periodic FIFO method, calculate Ciclons t-shirt 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 t-shirt design renewal have on the appropriate accounting for Ciclons inventory?

5. If Ciclon 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 Ciclons 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?

Please answer to all parts of these 5 questions, thank you in advance for your help!

Exhibit 1 Present Value Tables Present Value of $1 Periods 0.9259 0.8573 0.7938 0.7350 0.6806 0.6302 0.5835 0.5403 0.5002 0.4632 0.2146 0.0994 0.0460 0.0213 10% 0.9091 0.8264 0.7513 0.6830 0.6209 0.5645 0.5132 0.4665 0.4241 0.3855 0.1486 0.0573 0.0221 0.0085 12% 0.8929 0.7972 0.7118 0.6355 0.5674 0.5066 0.4524 0.4039 0.3606 0.3220 0.1037 0.0334 0.0108 0.0035 2 3 6 20 30 50 Present Value of an Ordinary Annuity of $1 Periods 5% 0.9259 1.7833 2.5771 3.3121 3.9927 4.6229 5.2064 5.7466 6.2469 6.7101 9.8182 11.2578 11.9246 12.2335 10% 0.9091 1.7355 2.4869 3.1699 3.7908 4.3553 4.8684 5.3349 5.7590 6.1446 8.5136 9.4269 9.7791 9.9148 12% 0.8929 1.6901 2.4018 3.0373 3.6048 4.1114 4.5638 4.9676 5.3282 5.6502 7.4694 8.0552 8.2438 8.3045 2 4 6 30 Exhibit 1 Present Value Tables Present Value of $1 Periods 0.9259 0.8573 0.7938 0.7350 0.6806 0.6302 0.5835 0.5403 0.5002 0.4632 0.2146 0.0994 0.0460 0.0213 10% 0.9091 0.8264 0.7513 0.6830 0.6209 0.5645 0.5132 0.4665 0.4241 0.3855 0.1486 0.0573 0.0221 0.0085 12% 0.8929 0.7972 0.7118 0.6355 0.5674 0.5066 0.4524 0.4039 0.3606 0.3220 0.1037 0.0334 0.0108 0.0035 2 3 6 20 30 50 Present Value of an Ordinary Annuity of $1 Periods 5% 0.9259 1.7833 2.5771 3.3121 3.9927 4.6229 5.2064 5.7466 6.2469 6.7101 9.8182 11.2578 11.9246 12.2335 10% 0.9091 1.7355 2.4869 3.1699 3.7908 4.3553 4.8684 5.3349 5.7590 6.1446 8.5136 9.4269 9.7791 9.9148 12% 0.8929 1.6901 2.4018 3.0373 3.6048 4.1114 4.5638 4.9676 5.3282 5.6502 7.4694 8.0552 8.2438 8.3045 2 4 6 30