Using APB opinion 21 and IRC Sec. 1274 to evaluate accounting and tax issues for an unusual loan.

Coffee, David ; Lirely, Roger

CASE DESCRIPTION

This case considers the financial accounting and tax issues associated with a loan made by a manufacturing company to the Atlanta Braves baseball team. The case has a difficulty level of four/five and is appropriate for an upper level financial accounting class or tax class. It is designed to be taught in one hour and requires two hours outside preparation by students.

CASE SYNOPSIS

A manufacturing company loans the Braves money at an interest rate below market. The Braves donate 20 season tickets to the company. Students are required to evaluate this transaction to determine: (1) how it should be treated for financial reporting purposes by the lender; and (2) the proper tax treatment of the transaction by the lender. The case demonstrates how financial accounting issues and tax issues can be similar as well as different in a business transaction.

JUST A SIMPLE LOAN OR NUCLEAR PHYSICS?

On January 1, 2003 the Georgia Products Company loaned the Atlanta Braves baseball team $100,000 in cash. The Braves signed a 3-year, 2% interest-bearing note due December 31, 2005. Interest is payable at the end of each year on December 31 and the principal is due December 31, 2005. The Georgia Products Company recorded the transactions to the loan as follows for 2003:

Georgia Product Books

January 1, 2003
 Notes Receivable $100,000
 Cash $100,000

December 31, 2003
 Cash $2,000
 Interest Income $2,000

As the partner in charge of the independent audit of Georgia Products, Gary Gaines is concerned about the loan. Gary has scheduled a lunch meeting with Linda Owens, Georgia Products Chief Financial Officer to discuss the loan. Gary and Linda, long time friends, are candid and to the point.

"Gary, the Board of Directors unanimously approved this loan so I'm not sure why we need to discuss this. I'm sure you've read the minutes. We feel the Braves have been an important part of the community and we wanted to show our appreciation to the Braves organization." Linda seemed just a little irritated, but Gary was used to her approach. Linda did not beat around the bush. She continued. "The Braves talked to us about increasing the interest of disadvantaged kids in the team. They had some good ideas, some really good stuff. But this kind of thing costs money. Roger (the Georgia Products CEO) took it to the board. Just between us, Roger asked the board for a gift. But you know the make-up of that group. They tabled that. Roger was able to squeeze a low interest loan out of them. Hell, I'm surprised he got that."

"Look Linda, I'm not questioning the right of the company to make the loan, nor am I suggesting that this is a misuse of stockholder money. My problem is how to properly account for this thing in the financials. And I have to wonder about tax implications."

"Gary, you worry to much. You've seen the books. We have a $100,000 note from the Braves, which we report as a $100,000 asset. We recognize the $2,000 as interest revenue. This is not nuclear physics. Fact is, everybody benefited. Heck, Roger had hoped for a gift and was embarrassed to go back to the Braves with just an offer of a loan. Know what? The Braves were genuinely grateful. They told Roger they are paying 10% for their money right now and appreciated the support of Georgia products. Going to mention us in the Braves promotions as a supporter of the disadvantaged kids program. Good for the company, good for the Braves, good for the kids, know what I mean?"

"Linda, your not listening. I'm not questioning the value of this to Georgia Products. I'm concerned about reporting and tax issues."

"Gary, I always listen. We couldn't make this thing any easier for you. And the Braves? They are so pleased that they sent the Company 20 season tickets. Did I mention that? We hope you can join us on opening day.

Gary picked up the check. He was trying to remember whom the Braves opened with. Maddox on the mound, no doubt. "Linda, count me in. But now I have to go back to the office and figure out the financial part of this thing. And I need to talk to Philip, our tax partner. I'm not so sure. This might be nuclear physics after all.

David Coffee, Western Carolina University

Roger Lirely, Western Carolina University