Identification of Errors in Financial Statements

Bay City Bombers, 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:

Bay City Bombers, INC.
Income Statement
For the Year Ended December 31, 1995
Revenues:
Single game ticket revenue $420,000
Season ticket revenue $140,000
Concessions revenue $280,000
Advertising revenue $100,000 $940,000
Expenses:
Cost of concessions sold $110,000
Salary expense - players $225,000
Salary and wage expense-staff $150,000
Rent expense $210,000 $695,000
Net Income $245,000

Bay City Bombers, INC.
Statement of Retained Earnings
For the Year Ended December 31, 1995
Beginning balance, January 1, 1995 $ -0-
Add: Net income for 1995 245,000
Deduct: Cash dividends paid in 1995 (40,000)
Ending balance, December 31, 1995 $205,000

Bay City Bombers, INC
Balance Sheet
At December 31, 1995
Assets Liabilities and Owners' Equity
Cash $5,000 Notes payable $50,000
Accounts receivable Capital stock 40,000
Season tickets 140,000 Additional owners' capital 80,000
Advertisers 100,000 Parent club's equity 125,000
Auxiliary assets 80,000 Retained earnings 205,000
Equipment 50,000
Player contracts 125,000
Total assets $500,000 Total liabilities and owners' equity $500,000

Additional information:

1. Single game tickets sold for $4 per game. The team averaged 1,500 fans per game. With 70 home games X $4 per game X 1,500 fans, single game ticket revenue amounted to $420,000.

2. No season tickets were sold during the first season. During the last three months of 1995, however, an aggressive sales campaign resulted in the sale of 500 season tickets for the 1996 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 X $4 per game X 70 games or $140,000.

3. 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 bill yet (thus, an account receivable of $100,000 on the balance sheet) because the contract with Bay City required them to pay only if the team averaged 2,000 fans per game during the 1995 season. The controller believes that the advertisers will be sympathetic to the difficulties of starting a new franchise and be willing to overlook the slight deficiency in the attendence requirement.

4. Bay City 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 certainly an asset to the organzation and has therefore recorded $5,000 X 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, 1996, as payment for the players for the 1995 season.

5. In addition to the cost described in part 4, Bay City directly pays each of its 25 players a $9,000 salary for the season. This amount - $225,000 - has already been paid for the 1995 season and is reported on the income statement.

6. 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 motgage with the bank for the full value of the house.

7. 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 January 15, 1996. Even though the team had a very successful first year, Bay City is a little short of cash at the end of 1995 and has therefore asked the bank for a three-month extension of the loan. The controller reasons that "by the due date of April 15, 1996, 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."

1. Identify any errors that you think the controller has made in preparing the financial statements.

2. On the basis of your answer in part 1, prepare a revised income statement, statement of retained earnings, and balance sheet.

3. On the basis of your revised financial statements, identify any ethical dilemma you now face. Do you have a responsibility to share these revisions with the other three owners? What is your responsibility to the bank?

Incase something is missing. Visit
http://www.mtholyoke.edu/courses/cljohnso/problems/chap1.html. Case 1-5