A group of five successful business people were awarded

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A group of five successful business people were awarded the franchise for one of two new
expansion teams in the North American Sports League (NASL). The professional sports
franchise was named the Rockets Franchise (RF). The Rockets are scheduled to begin playing
in the 2013/14 season. It is now June 2013, three months away from opening night. The group
formed a joint venture to operate RF. The main reason for doing so was to gain the flexibility
that they believed this structure could offer them.RF has appointed your accounting firm as
auditors for the year ending December 31, 2013. RF has also requested your firm's assistance
with the development of RF's accounting policies. You, CA, assigned to the job, and the partner
have met with the client. The following are notes from that meeting.1. The venturers have
various business backgrounds, and not all of them are looking for substantial financial
reward.However, there are limits to how much they are willing to invest if the project is not
financially successful. Most have successful businesses already established and are looking for
ways to get public exposure. Three of the venturers have each contributed $2 million in cash,
which will be used for start-up costs. One of the venturers has contributed a parcel of land on
which the new stadium will soon be built. The fifth venturer has contributed a combination of
cash, office equipment, time, and industry knowledge.2. A management group has been hired
to operate RF on a day-to-day basis. However, any major decisions must have the approval of
the five venturers.3. Before the expansion team franchise was awarded, a proposal to the
league's board of governors was prepared. As part of the proposal, RF had to commit to paying
a $50-million franchise fee and had to meet other conditions. All these other conditions have
been met. To strengthen its bid, RF took out local newspaper advertisements requesting
signatures from the public and organized a local parade to demonstrate the enthusiasm of the
city's sports fans.The venturers spent a total of $3 million of their personal funds in their bid to
obtain the franchise in addition to the funds invested in RF for start-up costs.4. A new stadium is
planned, to be ready by the beginning of the fourth season. In the meantime, RF has signed a
five-year lease for the existing 10,500-seat stadium. As part of the lease, RF will be responsible
for ensuring that the existing stadium meets local fire and safety regulations. It is estimated that
$500,000 will have to be spent to meet these standards.5. The Rockets' logo and color scheme
have been scientifically developed by psychologists employed by a product design firm owned
by one of the venturers. The cost was $1 million.6. The $50-million franchise fee has been
partially financed through several sources. Advance season ticket and advertising sales have
accounted for $10 million; the NASL has provided an interest-free loan of $15 million, payable at
the end of the third season; and the city provided a $5-million grant with no conditions.RF has
until the end of this calendar year to arrange the financing of the remaining funds or it will lose
the franchise.7. Revenues will be generated from several sources, as follows:a. Ticket sales.
Ticket sales will be in the form of pre-sold season tickets and game-day tickets. Thus far, 8,000
season tickets have been sold for the first season. Fans can also purchase the right to use
private boxes throughout the stadium, at a premium. Five of the exclusive private boxes are
reserved for the venturers, and 1,000 seats are restricted for promotional purposes and for
players' families and friends at no charge. Ticket sales are handled by a local ticket agency for a
fee of 5% of sales.b. Advertising space. As part of a promotion to increase sales of advertising
space in the stadium, RF has offered a discount of 15%, for the first year, to advertisers who
purchase advertising space for two seasons. The advertisers are billed on an annual basis.
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There are 100 advertising spaces in the stadium, of which 25% have been purchased at the
discounted price and 25% at the regular price. The regular price for an advertising space is
about $80,000 per season. Any unsold space will be occupied by advertisements from the
venturers' other businesses at no charge.c. Merchandising sales. RF has sold the exclusive
right to sell products using the Rockets' logo and design to a large sports clothing manufacturer
for $5 million plus a royalty of 5% of gross sales for five years. If at the end of the five years the
manufacturer has not sold $50 million worth of merchandise, RF will have to refund half of the
5% royalty payments made during the contract period. The $5 million is due immediately; the
5% royalty will be paid quarterly, commencing with the last quarter of this year.d. Concession
booth sales. During games, fans will be able to purchase hot dogs and popcorn at various
concession stands. RF will operate the booths and pay the stadium a royalty of 10% of sales.8.
The major expense besides rent will be the players' salaries. RF has been able to acquire the
rights to 15 veteran players from other established teams at no cost, except that RF must now
honor the individual players' contracts. There are no real superstars in this group of players.
Their average salary is about $200,000 per year, and the average remaining life of the contracts
is 2½ years. Contracts are guaranteed whether or not the players play.9. In June of every year
the NASL holds its annual entry draft where the rights to young sports players from minor
league teams, with no previous NASL experience, are acquired by NASL teams. Since the
Rockets is an expansion team, they were awarded the first pick in this year's draft, enabling
them to select one of the most promising players in the minor league. The Rockets have drafted
12 players in all, only three or four of whom are likely to see action in the fall of 2013 when the
season begins. The remaining players will be sent to the minor league team for further
development. The minor league team is owned by a local business that covers all costs except
the players' salaries. As RF owns the players' contracts, it is responsible for their
salaries.Historically, 35% of all players selected play more than one season in the major league.
The Rockets are confident that they have selected five players this year who are likely to see
action in the next couple of years. They group the players in three categories (A, B, and C),
which are also used to determine the players' compensation for their first contracts. Each player
selected has signed a contract, as outlined in Exhibit C6-4(a).10. To ensure that the Rockets
become successful, RF has acquired Kelly McDowell from another team. Kelly was named last
year's most valuable player in the league. In exchange, RF gave up two veteran players, as well
as one Group B player from the entry draft, and its first-round draft pick for the next five years.
Since Kelly is considered the best player in the league, RF also paid $5 million as part of the
trade. Kelly's former team owners were offered$15 million in cash by another team, but they felt
that RF's offer was slightly better, and could be extremely beneficial if one of the future
prospects ends up being a superstar.Kelly's contract has five years remaining, at a guaranteed
U.S. $1.2 million per year plus a bonus for 2013-14 of up to U.S. $500,000 if he repeats last
year's performance. RF is trying to renegotiate Kelly's contract, which has a clause allowing him
to negotiate a new deal with any other team in the league at the end of the 2013-14 season. RF
has the right to match any offer but, if it does not, it will lose Kelly's rights and receive no
compensation in return.11. RF has also been able to sign a deal with a very talented Swiss
player. The player was still under contract with the Swiss National Team at the time of signing.
Claims for damages under similar circumstances in the past have been made against other
teams by the Swiss National Team.Historically, these claims have averaged about $100,000,
but in recent cases the claims have reached $250,000. No claim has yet been made by the
Swiss.12. RF does not expect to be able to generate revenue from television or radio contracts
for several years.The partner has asked you to prepare a memo identifying the relevant
accounting issues that are likely to arise during the audit of RF and discussing how they should
be resolved.RequiredPrepare the memo to the partner.EXHIBIT C6-4(a)CONTRACT
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 SUMMARY1. Three Group A players have been signed by RF. These players are likely to play
in the Rockets' major league team in the 2013 14 season. It is anticipated that RF's first
selection overall in the draft will be the top rookie of the year and the scoring leader among the
first-year players. The contracts of the Group A players contain the following
terms:$100,000/year guaranteed for three years$50,000 signing bonus$50,000 performance
bonus based on points$100,000 for Rookie-of-the-Year award$25,000 if they play 50 or more
games the first yearFree apartment, to be shared with another playerFree use of a company car
for the first year2. Four Group B players have been signed by RF. These players will generally
play in the minor league for the first year and then will probably join the Rockets' major league
team in the following season. However, there may be one player who proves talented enough to
play in the major league this year.Their contracts provide:$50,000/year guaranteed for three
years$25,000 signing bonus$2,000 per game if they get called up to play for the Rockets.3. Five
Group C players have been signed by RF. These players will play in the minor league and
usually have only a remote chance of ever making it to the major league. It is likely that they will
not be re-signed when the contract has expired. Their contracts provide:$25,000/year
guaranteed for three years$10,000 signing bonus$2,000 per game if they get called up to play
for the RocketsIf they play more than 15 minor league games in a season, they get a new
contract at the Group B level.View Solution:
A group of five successful business people were awarded the

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