Marcy Anover owns 50 percent of the Seneca Hockey Club Limited (SHCL). The other 50 percent is owned by a major league hockey team. The major league team supplies many of the players for the team, which plays in the Class A Central College League. Some of the players are owned by SHCL, which signed them to contracts.

Most of the players that are signed to contracts by SHCL are paid a small signing bonus plus an annual wage. The wage is negotiated on the basis of the player’s skills and promise for rising to the major league level. Some of the players are not successful and are eventually released from their contracts. Players showing promise are promoted to AA and AAA leagues. Their contracts are purchased by the teams in the higher leagues. As a result, SHCL can sometimes make sizeable profit gains on sales of players’ contracts.

Until recently, SHCL has expensed all payments to players. However, this year they have spent close to $2,000,000 signing several promising players. Management believes that it should be able to develop several of these players and sell their contracts to teams at higher levels. The president of SHCL has asked you whether he can record the signing bonuses as assets, and only expense the players’ monthly wages. He believes that the players represent the major assets of a hockey team.

The president is willing to expense the capitalized signing bonuses whenever a player is released from the team. However, whenever a player’s contract is sold, the proceeds of sale would be recorded as revenue. The capitalized cost would then be expensed.

Required:

1. Select some key accounting concepts from the conceptual framework that you could use to defend your opinion that the signing bonuses:
   1. Should not be capitalized as assets.
   2. Should be capitalized, and expensed only when the player is released, or his contract is sold. Explain your reasoning.
2. If the signing bonuses are capitalized, and a player’s contract is later sold, should revenue be credited? Explain using the conceptual framework.

Answer rating: 100% (QA)

When considering whether the signing bonuses should be capitalized as assets or expensed immediately and whether revenue should be credited when a pla... View the full answer