Lakeside Slammers Inc. is a minor league baseball organization that has just completed its first season. You and three other investors organized the corporation; each put up $10,000 in cash for shares of capital stock. Because you live out of state, you have not been actively involved in the daily affairs of the club. However, you are thrilled to receive a dividend check for $10,000 at the end of the season—an amount equal to your original investment. Included with the check are the following financial statements, along with supporting explanations:
Additional information:
a. Single-game tickets sold for $4 per game. The team averaged 1,500 fans per game. With 70 home games $4 per game 1,500 fans, single-game ticket revenue amounted to $420,000.
b. No season tickets were sold during the first season. During the last three months of 2014, however, an aggressive sales campaign resulted in the sale of 500 season tickets for the 2015 season. Therefore, the controller (who is also one of the owners) chose to record an Account Receivable—Season Tickets and corresponding revenue for 500 tickets $4 per game 70 games, or $140,000.
c. Advertising revenue of $100,000 resulted from the sale of the 40 signs on the outfield wall at $2,500 each for the season. However, none of the advertisers have paid their bills yet (thus, an account receivable of $100,000 on the balance sheet) because the contract with Lakeside required payment only if the team averaged 2,000 fans per game during the 2014 season. The controller believes that the advertisers will be sympathetic to the difficulties of starting a new franchise and will be willing to overlook the slight deficiency in the attendance requirement.
d. Lakeside has a working agreement with one of the major league franchises. The minor league team is required to pay $5,000 every year to the major league team for each of the 25 players on its roster. The controller believes that each of the players is an asset to the organization and has therefore recorded $5,000 25, or $125,000, as an asset called Player Contracts. The item on the right side of the balance sheet entitled Parent Club’s Equity is the amount owed to the major league team by February 1, 2015, as payment for the players for the 2014 season.
e. In addition to the cost described in item (d), Lakeside directly pays each of its 25 players a $9,000 salary for the season. This amount—$225,000—has already been paid for the 2014 season and is reported on the income statement.
f. The items on the balance sheet entitled Auxiliary Assets on the left side and Additional Owners’ Capital on the right side represent the value of the controller’s personal residence. She has a mortgage with the bank for the full value of the house.
g. The $50,000 note payable resulted from a loan that was taken out at the beginning of the year to finance the purchase of bats, balls, uniforms, lawn mowers, and other miscellaneous supplies needed to operate the team. (Equipment is reported as an asset for the same amount.) The loan, with interest, is due on April 15, 2015. Even though the team had a very successful first year, Lakeside is a little short of cash at the end of 2014 and has asked the bank for a three-month extension of the loan. The controller reasons, ‘‘By the due date of April 15, 2015, the cash due from the new season ticket holders will be available, things will be cleared up with the advertisers, and the loan can be easily repaid.’’
Required
Use the Ethical Decision Framework in Exhibit 1-9, to complete the following requirements:
1. Recognize an ethical dilemma: For each of the items of additional information in (a) through (g) above, identify any errors you think the controller has made in preparing the financial statements. On the basis of your answers, prepare a revised income statement, statement of retained earnings, and balance sheet. What ethical dilemma(s) do you now face?
2. Analyze the key elements in the situation:
a. Who may benefit or be harmed?
b. How are they likely to benefit or be harmed?
c. What rights or claims may be violated?
d. What specific interests are in conflict?
e. What are your responsibilities and obligations?
3. List alternatives and evaluate the impact of each on those affected: As one of the investors in this organization, what are your options in dealing with the ethical dilemma(s) you identified in (1) above? Which provides the other investors and the bank with information that is most relevant, most complete, most neutral, and most free from error?
4. Select the best alternative: Among the alternatives, which one would you select?
Exhibit 1-9: