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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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In 1975, a trial was held to settle a tax dispute between the owners of the Atlanta Falcons, a National Football League franchise, and the Internal Revenue Service. In 1966, the owners had paid $8.5 million to purchase the franchise. They considered $50,000 to be the cost of the franchise (which is not depreciable for income tax reporting), $727,000 was deferred interest, and the remaining $7.7 million was claimed to be the cost of the players’ contracts and options. The dispute centered on several variables:

  • How much of the purchase price was assignable to television rights?
  • Can the value assignable to television rights be amortized? If so, what is the expected life?
  • How much of the purchase price was assignable to player contracts and options?
  • Over what life should the value assigned to the players be amortized?
  • What is the value of the franchise?

Required:

  1. 1. As an independent accountant, explain the approach you would take and the information you would need to provide advice to the court for the resolution of the points in dispute.
  2. 2. Do these valuation issues also create ethical issues?

1.

To determine

Describe the approach that the auditor would take and the information that auditor would need to provide advice to the court for the resolution of the given differences.

Explanation

Intangible assets: These are the long-term assets which are not physical in nature, but possess value. The intangible assets would be amortized over their definite useful life or limited useful life, and those with indefinite or unlimited lives are not amortized.

The purchase price that was assignable to television rights are:

  • For the television rights, a considerable value is attached. In order to compute the present value of the cash flows expected under the current television contract, a conservative approach method is valued.

Describe whether the values assigned to television rights are amortized and its useful life:

  • Since the intangible right for each season (the right to broadcast games) is partially used, thereby the value assigned to the television rights can be amortized. The useful life of the amortization is over the period of time covered by the television rights...

2.

To determine

Describe whether the valuation issues would generate ethical issues.

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