Wonderful Racing Inc. (WR) is a promoter and sponsor of motorsport activities. It is privately owned. The owner is looking to expand and has approached the local bank, which has agreed to accept financial statements prepared in accordance with ASPE. The company owns two racetracks where it hosts races (including those sponsored by NASCARthe National Association for Stock Car Auto Racing) and operates a driving school. In between races, it rents the facilities out.

WR operates like a club. An upfront fee is charged, which gives the individual the right to belong to the club for his or her lifetime. WR owns a fleet of high performance stock cars that members may adopt. All members adopt a car, as this is a main reason for joining the club. Under the adoption agreement, individuals pay a monthly fee for access to the stock car and the rights to race the car on the racetracks for a certain number of hours a week (including unlimited gas).

Individuals must get insurance in order to adopt a car, but this is provided by WR, which has a master insurance plan. Race-car driving is risky and insurance premiums are very high (as is the injury and mortality rate). The master insurance plan is negotiated by WR with an outside insurance company and covers all club members. The monthly fee covers the insurance.

Adoptions are annual and individuals often switch cars each year. The company just completed a membership drive and has signed 100 new members at $20,000 each. This amount has been paid upfront and received prior to year end. It is non-refundable. In order to become a member, individuals have to prove that they are capable of driving race cars safely. To this end, all members must take a two-week racing course and qualify for the company's stringent insurance program. All new members had completed the requirements by year end.

The company is being sued by the surrounding community for alleged pollution from the racing activities. Apparently, the racing cars produce a fair amount of airborne toxins, which settle in the surrounding area. Unknown to WR, the nearby city had passed a bylaw stating that companies must clean up any pollution that they are responsible for. WR's lawyers have argued on a preliminary basis that the alleged pollution in the surrounding area is due to the nearby superhighway and airport and that it is not possible to prove that WR is the cause of the pollution. Even if it were found to be responsible for a small fraction of it, it would be very difficult to determine just what that fraction is. The lawyers are therefore denying that WR has any responsibility with respect to cleanup. The lawyers for the surrounding community have asked for WR's financial statements to determine whether the company is profiting at their expense.

REQUIRED:

Assume the role of the controller and discuss the financial reporting issues. (use the case analysis framework covered in the course, refer to the Discussion Section for reference if needed).