Club Loop Corporation CL is a large owner operator and

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Club Loop Corporation (CL) is a large owner, operator, and developer of golf clubs and resorts.
The company is privately owned by several wealthy individuals. During the current year,
according to the draft financial statements, revenues increased by 7.2% and net operating
income increased by 13% to $22.5 million. Net income dropped from $2.9 million to $822,000.
The decrease was largely due to two events: a change in accounting policy and costs related to
the settlement of a lawsuit.One of the company’s objectives is to always ensure that capital
resources are readily available to meet approved capital expenditures and to take advantage of
growth opportunities. According to the draft year-end financial statements, the company has
current assets of $12 million and current liabilities of $28 million, resulting in a working capital
deficit. Included in the current liabilities are long-term debts that are currently due. The company
is working with the financial institutions in question to renew or replace these facilities. CL has
received unsolicited expressions of interest from several financial institutions concerning these
facilities, and management believes that these facilities will be replaced- hopefully before the
current financial statements are issued.The company owns most of the land on which CLJs golf
courses are developed. Currently, the company follows a rigorous "weed and feed" program in
order to keep the grass on the golf courses in top shape. The chemicals in these fertilizers,
herbicides, and insecticides are felt by some people in the local community to be toxic to the
environment. The company has met with several community groups and has agreed to study
the issue further. In a current meeting of the board of directors, the CEO committed the
company to spending $1 million to limit any potential damage. As at year end, none of this
amount has yet been spent. There is a concern that the community groups are going to launch
legal proceedings and the company feels that this move will help CI.Js position if there ends up
being a lawsuit. Part of the money is for landscaping to limit the spread of the sprayed
chemicals and part of it is for advertising to promote the company as a good corporate
citizen.The company is currently developing new golf courses. All direct costs related to the
acquisition, development, and construction of these properties, including interest and
management costs, are capitalized. For one of the new locations, which was just purchased and
developed in the current year, the company has run into a small problem. After CL spent several
million dollars on development, the planned golf course is being blocked by environmental
groups. The costs to develop the land have been capitalized as previously mentioned, on the
basis that they would be recoverable from future membership revenues. However, the company
has now decided to sell the land to a real estate developer.CL.Js stock-based compensation
plan consists of stock options. The company does not recognize any expense for this plan when
stock options are issued to employees. It has been company policy to repurchase any shares
issued under these stock option plans, although this year the company has indicated that it
might not do this since it is planning to redesign the stock-based compensation system.On July
I, the government tax department issued notices of assessment to the company regarding a
dispute over the recognition of revenues. Although the outcome of an appeal of the assessment
cannot be determined, the company believes that it will owe S8.7 million if its appeal is
unsuccessful.InstructionsAdopt the role of the company's auditor and prepare an analysis of the
financial reporting issues.View Solution:
Club Loop Corporation CL is a large owner operator and

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