Bakersfield Ball Boys Limited BBB operates a Canadian professional baseball
Bakersfield Ball Boys Limited (BBB) operates a Canadian professional baseball club, the Bakersfield Ball Boys, that won the Canadian Baseball League title in October Year 10. BBB is 30% owned by Mr. Bill Griffin, Bakersfield’s wealthiest citizen; 19% by Excavating Inc., a real estate development company; and 51% by Tall Bottle Ltd. (Tall Bottle), a national brewery and a public company.
Your employer, Mayer & Partners, has audited BBB’s financial statements for the past several years. It is now May 3, Year 11, and you, the CA, are responsible for the audit of BBB for the year ending June 30, Year 11. The club’s year-end was chosen to correspond with the year-end of Tall Bottle, even though the baseball season runs from April to October.
In addition to marking BBB’s first-ever Canadian championship, the year ending June 30, Year 11, will be noteworthy from an operational standpoint. You and your staff have become aware of the following:
1. BBB moved into Big Top, a newly built stadium with a retractable roof, on August 1, Year 10. Seating capacity is 70,000. The new stadium is a great improvement over the 30,000-seat NoWay Park stadium used for the preceding seven years. On July 20, Year 10, BBB signed a 10-year lease with the new stadium’s owners. However, BBB’s lease on the old premises was not due to expire until January 1, Year 14. BBB therefore paid $3.6 million to terminate its lease.
2. Commencing with the Year 10 baseball season (April Year 10 to October Year 10), the league started a new revenue equalization program. In October, each baseball club in the league is required to remit to the league 50% of the revenues from the ticket sales for the season. The league then distributes these revenues, after deducting league costs, in equal amounts to each club. For the Year 10 baseball season, BBB contributed $11.6 million to the league and received $9.2 million, its share of net league revenues. The new equalization program was not accounted for in the June 30, Year 10, financial statements.
3. Immediately before the start of the Year 11 baseball season in April, three of the club’s top players were signed to long-term contracts. As a result of these commitments, the club decided to purchase annuities on behalf of these players that would fund the amount required to cover each salary. The annuities for each player were purchased on April 2, Year 11. Amounts of the contracts and annuities are as follows:
The contracts of Ferter and Blast specify that if they suffer a career-ending injury, their contracts will become null and void. Board’s contract is guaranteed for the full term.
On April 15, Year 11, Board was injured, forcing him to retire from playing baseball. As required by his contract, he has since been moved to the front office and is performing public relations and administrative services for both BBB and Tall Bottle. Tall Bottle pays BBB $5,000 for each of Board’s appearances at a Tall Bottle function. Board has made two appearances at Tall Bottle since his injury.
Ferter has a bonus clause in his contract under which he will be paid $50,000 if he is selected to play for the All Star Team. Although he is favoured to capture this honour, the selections will not be announced until after the financial statements have been issued.
Because of Ferter’s exceptional ability and the fact that he is considered
a “player who will increase the popularity of the sport in this city for many years to come,” management proposes to amortize the cost of his contract over a 10-year period.
4. On April 2, Year 11, the club renewed its contract with Sportsplus, a local television station, for three years. Sportsplus will pay BBB $30,000 per game for the right to televise 25 regular season games and $75,000 for each play- off game. In addition, BBB received a $250,000 bonus for re-signing, and $315,000 for its high ratings over the previous contract term. Tall Bottle enjoys an exclusive advertising contract with Sportsplus as BBB’s official sponsor. The contract provides Tall Bottle with three one-minute ads for each game televised by Sportsplus. The advertising was granted to Tall Bottle by
Sportsplus free of charge in exchange for BBB’s local television rights.
5. BBB’s contract with its management includes a bonus clause, to take effect in the year ended June 30, Year 11. Bill Griffin and Excavating Inc. had opposed the scheme, as the bonus is based on annual pre-tax income. However, they agreed to it after much pressure from management and Tall Bottle.
6. On October 3, Year 10, the day before the last playoff game, a windstorm caused the roof at Big Top to collapse, resulting in structural damage of $4,500,000 to the stadium. This unforeseen event forced BBB’s last playoff game to be played at NoWay Park. Hence, the club announced that some of the 70,000 seats sold for Big Top could be used at NoWay Park and that the $35 cost of the remaining tickets could be either refunded or applied toward the cost of tickets for any of BBB’s Year 11 games. Also, the 40,000 fans who could not attend the game at NoWay were given $12 gift certificates that could be used toward purchasing tickets for any future BBB game.
As a result of the roof collapse at Big Top, BBB incurred the following costs for its final playoff game at NoWay:
Groundskeepers.......... $ 9,000
Cleaning crew ........... 15,250
Food vendors.......... 19,200
Stadium rental .......... 132,500
A separate cleaning crew had to be hired for the NoWay Park game, as the club’s regular cleaning crew was required to assist in the cleanup at Big Top. BBB’s lease costs of $50,000 were not waived during the reconstruction of Big Top. Had the playoff game been played at Big Top, the following costs would have been incurred:
Groundskeepers......... $16,500
Cleaning crew........... 25,750
Food vendors........... 32,900
Actual food sales at NoWay were $191,750, with food costs averaging 50% of sales. BBB was required to pay the stadium owners a 10% share of sales, whereas, at Big Top, BBB would have been required to pay a 15% share of sales.
BBB’s management has asked your firm to prepare a statement of loss to support its claim for damages in accordance with its business-interruption insurance policy. The insurance policy covers the loss of income as well as the additional expenses that result from a disaster.
The partner in charge of the engagement has asked you, the CA, to prepare the information requested by the client. In addition, the partner would like you to present a memo with your analysis of the accounting issues that you and your staff have become aware of, as well as your recommendations.
Prepare the information requested by the client and the memo to the partner.
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