Q1. You are an audit manager of Morline & Co, a Public Accounting firm. The audit engagement partner, Joe Tan, has called you into his office to discuss a new audit client. You have been assigned to take charge of the audit for the financial year end, 31 December 2019 of Crown Hotel Group Bhd. (Crown Group) a listed company. The Group operates a chain of luxury hotels across Malaysia. As part of the expansion strategy, Crown Group has recently acquired a new hotel in Melbourne. You are very excited about auditing this luxury group of hotels, and are hoping that you may get to stay in one of the hotels during the audit.

Recently you had a meeting with Joe Tan, Datuk Paul Wong, the managing director of Crown Group, and Lisa Goh, the finance director of Crown Group. From detailed discussions with them, you note the following information:

Background information:
Crown Group owns four hotels in Malaysia namely Dolce, Corus, Korma, Morib, one hotel, Belux in Singapore and a newly acquired hotel in Melbourne namely Aston, which was acquired in September 2019. Each hotel operates through a separate legal entity, and Crown Group owns 100% of each entity. The Group prepares consolidated financial statements on an annual basis. The Head Office is located in Petaling Jaya, Malaysia.

In 2019, the Crown Group had total revenues of RM 90 million (2018: RM 80 million), and operating profits of RM 8,500,000 (2018: RM 11,000,000).

Lisa Goh explained that all the hotels have been performing well over the last year, with the exception of Hotel Belux. See notes below

Information Technology (IT)

Lisa Goh highlighted that the Crown Group relies heavily on the use of information technology (IT) and noted that approximately 96% of bookings are made online via its website. The Group invested significantly in IT over the last six months, which resulted in an extensive upgrade of its website and the development of a user-friendly app. Datuk Paul Wong said, “We have spent a significant amount of money developing our IT systems and ensuring they are secure, as the rapid increase in cybercrime in Malaysia is frightening.” This development cost was capitalised in Financial Year 2019.

Finance team

Each hotel has a finance team, including a financial controller. At the end of every month, a reporting pack is prepared by the financial controller, including a copy of the management accounts, key completed reconciliations and detailed commentary on how the hotel has met the key performance indicators for that particular month. Each reporting pack is submitted to the head office, and the group financial controller reviews them and performs additional reconciliations. The group financial controller also prepares the year-end consolidated financial statements. Lisa Goh has, however, informed you that the group financial controller resigned in November 2019 because he could not cope with the pressure of the job. She has not been able to find a suitable replacement as to date. Lisa has asked if your firm would be able to help with the finalisation of the consolidated financial statements for the year ended 31 December 2019, as her team is currently struggling to find the time needed.

New acquisition

The hotel in Melbourne, Aston was acquired in September 2019 for RM 8,500,000, and will be included in the consolidated financial statements at 31 December 2019. The purchase of the hotel was financed by a bank loan. Datuk Paul Wong explained this was a significant investment for the Crown Group and that a further RM 2 million has since been spent on capital expenditure to ensure it meets the exceptionally high standards of the Group. Datuk Paul Wong has invited the entire audit team to travel to Melbourne for the opening of the hotel in June 2020 as his guests. He has also assured the team will be treated very well while there.

Valuation of the hotel properties

The group policy is to value Land and Buildings at fair value. The calculation of fair value and the allocation of fair value to Land and Buildings requires significant judgement. Datuk Paul Wong confirmed professional valuation experts were appointed to value Land and Buildings at 31 December 2019. Land and Buildings at that date were valued at RM 110 million, representing a revaluation increase of RM 12 million.

Loans and Borrowings
During the financial year to 31 December 2019, the Group borrowed RM 10,500,000 in order to finance the purchase of the Aston, and to complete the renovation work required. The loan is repayable over 10 years and the Group must adhere to strict loan covenants. The bank requires the Group to provide management accounts on a quarterly basis, if a loan covenant is breached, the loan may be due for repayment immediately. Lisa Goh has informed you that the group is also struggling to ensure management accounts for the quarter ended 31 December 2019 will be submitted within the allocated timeframe. The amount of interest paid was extremely significant

Bonus
During the year, a new bonus scheme was introduced for both managers and directors for all the hotel within the group in order to increase revenue. The bonus is directly linked to revenue.

Advance payment
Advance deposits of 50% are collected for those booking for conferences and wedding packages.

Hotel Belux
The hotel Belux is one of the biggest in the Group, and contributes 25% of total revenue is located in Singapore. Although revenue has increased in 2019, profit has fallen significantly due to a number of “special offers” in both accommodation rates and the restaurant. Datuk Paul Wong believes the main causes for this fall are reduced gross margins (due to the successful uptake of the various special offer promotions during the year) and increasing costs (mainly driven by payroll). The number of special offers were approved by management in a bid to counter the tough economic environment within which the hotel operates and thereby increase revenue.

Required:
(i) Identify and explain to the audit partner SEVEN (7) key audit risks in respect of Crown Group.
(ii) Describe the matters Morline & Co should consider in the context of ISA 620 in order to evaluate the adequacy of the expert’s work in relation to engaging the services of a property expert to value Land and Buildings.
(iii) Evaluate the ethical issues(s) if any in respect of the Crown Group audit engagement and recommend appropriate safeguard(s).

SYN 960 Business Government & Society

Albright College

Application Test #1

Read the following case below and then answer the questions following the case.

Case: A Brawl in Mickey’s Backyard

Outside City Hall in Anaheim, California—home to the theme park Disneyland—dozens

of protestors gathered in August 2007 to stage a skit. Wearing costumes to emphasize their

point, activists playing “Mickey Mouse” and the “evil queen” ordered a group of “Disney

workers” to “get out of town.” The amateur actors were there to tell the city council in a

dramatic fashion that they supported a developer’s plan to build affordable housing near

the world-famous theme park—a plan that Disney opposed.

“They want to make money, but they don’t care about the employees,” said Gabriel de

la Cruz, a banquet server at Disneyland. De la Cruz lived in a crowded one-bedroom apartment

near the park with his wife and two teenage children. “Rent is too high,” he said. “We

don’t have a choice to go some other place.”

The Walt Disney Company was one of the best-known media and entertainment companies

in the world. In Anaheim, the company operated the original Disneyland theme park,

the newer California Adventure, three hotels, and the Downtown Disney shopping district.

The California resort complex attracted 24 million visitors a year. The company as a whole

earned more than $35 billion in 2007, about $11 billion of which came from its parks and

resorts around the world, including those in California.

Walt Disney, the company’s founder, had famously spelled out the resort’s vision when

he said, “I don’t want the public to see the world they live in while they’re in Disneyland.

I want them to feel they’re in another world.”

Anaheim, located in Orange County, was a sprawling metropolis of 350,000 that had

grown rapidly with its tourism industry. In the early 1990s, the city had designated two square

miles adjacent to Disneyland as a special resort district, with all new development restricted

to serving tourist needs, and pumped millions of dollars into upgrading the area. In 2007, the

resort district—5 percent of Anaheim’s area—produced more than half its tax revenue.

Housing in Anaheim was expensive, and many of Disney’s 20,000 workers could not

afford to live there. The median home price in the community was more than $600,000,

and a one-bedroom apartment could rent for as much as $1,400 a month. Custodians at the

park earned around $23,000 a year; restaurant attendants around $14,000. Only 18 percent

of resort employees lived in Anaheim. Many of the rest commuted long distances by car

and bus to get to work.

The dispute playing out in front of City Hall had begun in 2005, when a local developer

called SunCal had arranged to buy a 26-acre site in the resort district. (The parcel was directly

across the street from land Disney considered a possible site for future expansion.)

SunCal’s plan was to build around 1,500 condominiums, with 15 percent of the units set

aside for below-market-rate rental apartments. Because the site was in the resort district,

the developer required special permission from the city council to proceed.

Affordable housing advocates quickly backed SunCal’s proposal. Some of the unions

representing Disney employees also supported the idea, as did other individuals and groups

drawn by the prospect of reducing long commutes, a contributor to the region’s air pollution.

Backers formed the Coalition to Defend and Protect Anaheim, declaring that “these

new homes would enable many . . . families to live near their places of work and thereby

reduce commuter congestion on our freeways.”

Disney, however, strenuously opposed SunCal’s plan, arguing that the land should be

used only for tourism-related development such as hotels and restaurants. “If one developer

is allowed to build residential in the resort area, others will follow,” a company

spokesperson said. “Anaheim and Orange County have to address the affordable housing

issue, but Anaheim also has to protect the resort area. It’s not an either/or.” In support of

Disney’s position, the chamber of commerce, various businesses in the resort district, and

some local government officials formed Save Our Anaheim Resort District to “protect our

Anaheim Resort District from non-tourism projects.” The group considered launching an

initiative to put the matter before the voters.

The five-person city council was split on the issue. One council member said that if

workers could not afford to live in Anaheim, “maybe they can move somewhere else . . .

where rents are cheaper.” But another disagreed, charging that Disney had shown “complete

disregard for the workers who make the resorts so successful.”

Sources: “Disneyland Balks at New Neighbors,” USA Today, April 3, 2007; “Housing Plan Turns Disney Grumpy,” The New

York Times, May 20, 2007; “In Anaheim, the Mouse Finally Roars,” Washington Post, August 6, 2007; and “Not in Mickey’s

Backyard,” Portfolio, December 2007.

1. Using Disney as the focal organization, identify all the relevant stakeholders to this case.

2. For each of the stakeholders above, clear explain their respective “interest” or claim to the situation using evidence from the case. Also, indicate if each stakeholder is in

favor of, or opposed to, SunCal’s proposed development.

3. What sources of power do each of the relevant stakeholders identified above have in this case?

4. Based on the information you have included in your stakeholder analysis/map, what do you believe is the socially responsible decision for Disney? Justify your solution by applying either the ownership theory of the firm or the stakeholder theory of the firm.

Developing an Equation from Average Costs The America Dog and Cat Hotel is a pet hotel located in Las Vegas. Assume that in March, when dog-days (occupancy) were at an annual low of 500, the average cost per dog-day was $14. In July, when dog-days were at a capacity level of 4,000, the average cost per dog-day was $7. (a) Develop an equation for monthly operating costs. (Let X = dog-days per month) Total cost = Answer + Answer * X (b) Determine the average cost per dog-day at an annual volume of 24,000 dog-days.

1. Use this data table for the bromination of acetone to answer the following questions;

a) Determine the reaction order with respect to each of the three reactants and write the rate law.

b) What is the value of the rate constant including proper units?

Pleasanton Studios Kersten Brown, the CEO of Pleasanton Studios, is having a tough week - all three of her top management level employees have dropped in with problems. One executive is making questionable decisions, another is threatening to quit, and the third is reporting losses (again). Kersten is hoping to find simple answers to all her difficulties. She is asking you (her accountant) for some advice on how to proceed. Pleasanton Studios owns and operates three decentralized divisions: Entertainment, Streaming, and Parks. Pleasanton Studios has a decentralized organizational structure, where each division is run as an investment center. Division managers meet with the CEO at least once annually to review their performance, where each division manager's performance is measured by their division's return on investment (ROI). The division manager then receives a bonus equal to 10% of their base salary for every ROI percentage point above the cost of capital. The Entertainment division manager, John Freeman, was the first to knock on Kersten's door this morning. Entertainment, Pleasanton Studios' first endeavor, produces movies for the big screen. Entertainment has been in operation since 1965. Last month, John had mentioned a proposal to build a new animation studio. The build would cost $4,910,000 with an estimated life of 20 years and no salvage value and would allow Entertainment to start producing animated movies. Animated movies were projected to bring in an additional $1,210,000 in revenues each year, but would increase annual production costs by $574,000. John had dropped in to let Kersten know he had decided not to move forward with the animation studio. This surprised Kersten - her quick mental calculation indicated that the studio would have a payback period of 8 years, much shorter than the expected life of the studio. Not entirely sure that her quick assessment was valid, Kersten needed to check with her accountant on the matter. Next to Kersten's door was the manager of Streaming, which produces short-form (30 minute to one hour) episodes in addition to streaming the movies developed by Entertainment. Customers then buy subscriptions to the service. Run by division manager Reyna Imanah, Streaming was introduced in 2016 and has increased subscriptions by 20% every year since. Reyna's complaint was that, based on the current bonus payout schedule, John Freeman's bonus last year was significantly higher than hers. She points to the increasing subscription rates at Streaming, and says that her division is being punished for having opened so recently (her division's facilities are much more recent than those in Entertainment). She currently has an employment offer from another company at the same base pay rate, and stated that she will accept this offer unless she feels her performance is being appropriately acknowledged and compensated. Kersten needs to look at the relative performance across divisions to determine how to proceed with Reyna. Pleasanton Parks is a theme park based on the movies from Entertainment and the series from Streaming. For many years, it was a popular year-round destination, with characters, rides, and a hotel. This park has lost popularity in recent years, and has been 'in the red' for the past two years. If the park is not profitable this year, you will need to decide whether to permanently close that division. Included in the 'Fixed COGS' for Parks is an annual $1,650,000 mortgage payment on the land and buildings for the park, which would still need to be paid (as a corporate level cost) if the park is closed and that segment is removed from the financial statements. Incidentally, you recently had a conversation with a Marriott Hotels executive, who would like to expand into the area. If you decided to close Parks, you are fairly certain that you could lease the hotel facilities to Marriott for $650,000 annually. A partial report of this year's financial results for Pleasanton Studios can be found in Table 1 below. The 'Selling and admin costs' listed in Table 1 are directly incurred by each division, and are determined at the beginning of each year (that is, they do not change with increased/decreased production). In addition to the divisional information above, there are $2,000,000 in corporate costs that are currently allocated evenly between the three divisions. These costs are primarily due to employee benefits costs, which are billed at the corporate level. If the Parks division is closed, the decreased employee base would reduce allocated corporate costs by $500,000. Pleasanton Studios has a cost of capital of 12 percent (and Kersten uses the cost of capital as their required rate of return) and are subject to 32% income taxes. Before she can make any decisions, Kersten needs to evaluate this year's performance results. She sets off to see you, the company's accountant, for answers.

Table 1: Pleasanton Studios current year data Experience Streaming Parks Revenues $54,583,520 $30,184,570 $7,564,270 Fixed COGS $3,356,850 $4,074,530 $3,159,430 Variable COGS $40,257,310 $22,020,695 $3,698,928 # of customers 15,264,200 1,420,060 30,240 # of employees 11,562 1,954 1,378 Average net operating assets $29,014,000 $19,252,000 $420,000 Selling and admin costs $3,259,520 $944,620 $231,900  

b. Evaluate Entertainment's decision not to invest in the new animation studio (i.e., was the decision appropriate and in the best interests of Pleasanton Studios), including the appropriate financial analyses to support your evaluation. c. Evaluate the validity of Reyna Imanah's complaint regarding her evaluated performance. Explain why it is (or is not valid), and what further information would be necessary. d. Provide a recommendation on whether to close the Parks division, including all necessary financial analyses.

Kersten Brown, the CEO of Pleasanton Studios, is having a tough week - all three of her top management level employees have dropped in with problems. One executive is making questionable decisions, another is threatening to quit, and the third is reporting losses (again). Kersten is hoping to find simple answers to all her difficulties. She is asking you (her accountant) for some advice on how to proceed. Pleasanton Studios owns and operates three decentralized divisions: Entertainment, Streaming, and Parks. Pleasanton Studios has a decentralized organizational structure, where each division is run as an investment center. Division managers meet with the CEO at least once annually to review their performance, where each division manager's performance is measured by their division's return on investment (ROI). The division manager then receives a bonus equal to 10% of their base salary for every ROI percentage point above the cost of capital. The Entertainment division manager, John Freeman, was the first to knock on Kersten's door this morning. Entertainment, Pleasanton Studios' first endeavor, produces movies for the big screen. Entertainment has been in operation since 1965. Last month, John had mentioned a proposal to build a new animation studio. The build would cost $4,910,000 with an estimated life of 20 years and no salvage value and would allow Entertainment to start producing animated movies. Animated movies were projected to bring in an additional $1,210,000 in revenues each year, but would increase annual production costs by $574,000. John had dropped in to let Kersten know he had decided not to move forward with the animation studio. This surprised Kersten - her quick mental calculation indicated that the studio would have a payback period of 8 years, much shorter than the expected life of the studio. Not entirely sure that her quick assessment was valid, Kersten needed to check with her accountant on the matter. Next to Kersten's door was the manager of Streaming, which produces short-form (30 minute to one hour) episodes in addition to streaming the movies developed by Entertainment. Customers then buy subscriptions to the service. Run by division manager Reyna Imanah, Streaming was introduced in 2016 and has increased subscriptions by 20% every year since. Reyna's complaint was that, based on the current bonus payout schedule, John Freeman's bonus last year was significantly higher than hers. She points to the increasing subscription rates at Streaming, and says that her division is being punished for having opened so recently (her division's facilities are much more recent than those in Entertainment). She currently has an employment offer from another company at the same base pay rate, and stated that she will accept this offer unless she feels her performance is being appropriately acknowledged and compensated. Kersten needs to look at the relative performance across divisions to determine how to proceed with Reyna. Pleasanton Parks is a theme park based on the movies from Entertainment and the series from Streaming. For many years, it was a popular year-round destination, with characters, rides, and a hotel. This park has lost popularity in recent years, and has been 'in the red' for the past two years. If the park is not profitable this year, you will need to decide whether to permanently close that division. Included in the 'Fixed COGS' for Parks is an annual $1,650,000 mortgage payment on the land and buildings for the park, which would still need to be paid (as a corporate level cost) if the park is closed and that segment is removed from the financial statements. Incidentally, you recently had a conversation with a Marriott Hotels executive, who would like to expand into the area. If you decided to close Parks, you are fairly certain that you could lease the hotel facilities to Marriott for $650,000 annually. A partial report of this year's financial results for Pleasanton Studios can be found in Table 1 below. The 'Selling and admin costs' listed in Table 1 are directly incurred by each division, and are determined at the beginning of each year (that is, they do not change with increased/decreased production). In addition to the divisional information above, there are $2,000,000 in corporate costs that are currently allocated evenly between the three divisions. These costs are primarily due to employee benefits costs, which are billed at the corporate level. If the Parks division is closed, the decreased employee base would reduce allocated corporate costs by $500,000. Pleasanton Studios has a cost of capital of 12 percent (and Kersten uses the cost of capital as their required rate of return) and are subject to 32% income taxes. Before she can make any decisions, Kersten needs to evaluate this year's performance results. She sets off to see you, the company's accountant, for answers.

Table 1: Pleasanton Studios current year data Experience Streaming Parks Revenues $54,583,520 $30,184,570 $7,564,270 Fixed COGS $3,356,850 $4,074,530 $3,159,430 Variable COGS $40,257,310 $22,020,695 $3,698,928 # of customers 15,264,200 1,420,060 30,240 # of employees 11,562 1,954 1,378 Average net operating assets $29,014,000 $19,252,000 $420,000 Selling and admin costs $3,259,520 $944,620 $231,900  

a. Evaluate this year's performance results for the three divisions. Your financial analysis should include a segmented income statement for Pleasanton Studios, as well as the current annual ROI, residual income and EVA for the three divisions. b. Evaluate Entertainment's decision not to invest in the new animation studio (i.e., was the decision appropriate and in the best interests of Pleasanton Studios), including the appropriate financial analyses to support your evaluation. c. Evaluate the validity of Reyna Imanah's complaint regarding her evaluated performance. Explain why it is (or is not valid), and what further information would be necessary. d. Provide a recommendation on whether to close the Parks division, including all necessary financial analyses.

Kersten Brown, the CEO of Pleasanton Studios, is having a tough week – all three of her top management level employees have dropped in with problems. One executive is making questionable decisions, another is threatening to quit, and the third is reporting losses (again). Kersten is hoping to find simple answers to all her difficulties. She is asking you (her accountant) for some advice on how to proceed.

Pleasanton Studios owns and operates three decentralized divisions: Entertainment, Streaming, and Parks. Pleasanton Studios has a decentralized organizational structure, where each division is run as an investment center. Division managers meet with the CEO at least once annually to review their performance, where each division manager’s performance is measured by their division’s return on investment (ROI). The division manager then receives a bonus equal to 10% of their base salary for every ROI percentage point above the cost of capital.

The Entertainment division manager, John Freeman, was the first to knock on Kersten’s door this morning. Entertainment, Pleasanton Studios’ first endeavor, produces movies for the big screen. Entertainment has been in operation since 1965. Last month, John had mentioned a proposal to build a new animation studio. The build would cost $4,910,000 with an estimated life of 20 years and no salvage value and would allow Entertainment to start producing animated movies. Animated movies were projected to bring in an additional $1,210,000 in revenues each year, but would increase annual production costs by $574,000. John had dropped in to let Kersten know he had decided not to move forward with the animation studio. This surprised Kersten – her quick mental calculation indicated that the studio would have a payback period of 8 years, much shorter than the expected life of the studio. Not entirely sure that her quick assessment was valid, Kersten needed to check with her accountant on the matter.

Next to Kersten’s door was the manager of Streaming, which produces short-form (30 minute to one hour) episodes in addition to streaming the movies developed by Entertainment. Customers then buy subscriptions to the service. Run by division manager Reyna Imanah, Streaming was introduced in 2016 and has increased subscriptions by 20% every year since. Reyna’s complaint was that, based on the current bonus payout schedule, John Freeman’s bonus last year was significantly higher than hers. She points to the increasing subscription rates at Streaming, and says that her division is being punished for having opened so recently (her division’s facilities are much more recent than those in Entertainment). She currently has an employment offer from another company at the same base pay rate, and stated that she will accept this offer unless she feels her performance is being appropriately acknowledged and compensated. Kersten needs to look at the relative performance across divisions to determine how to proceed with Reyna.

Pleasanton Parks is a theme park based on the movies from Entertainment and the series from Streaming. For many years, it was a popular year-round destination, with characters, rides, and a hotel. This park has lost popularity in recent years, and has been ‘in the red’ for the past two years. If the park is not profitable this year, you will need to decide whether to permanently close that division. Included in the ‘Fixed COGS’ for Parks is an annual $1,650,000 mortgage payment on the land and buildings for the park, which would still need to be paid (as a corporate level cost) if the park is closed and that segment is removed from the financial statements. Incidentally, you recently had a conversation with a Marriott Hotels executive, who would like to expand into the area. If you decided to close Parks, you are fairly certain that you could lease the hotel facilities to Marriott for $650,000 annually.

A partial report of this year’s financial results for Pleasanton Studios can be found in Table 1 below. The ‘Selling and admin costs’ listed in Table 1 are directly incurred by each division, and are determined at the beginning of each year (that is, they do not change with increased/decreased production). In addition to the divisional information above, there are $2,000,000 in corporate costs that are currently allocated evenly between the three divisions. These costs are primarily due to employee benefits costs, which are billed at the corporate level. If the Parks division is closed, the decreased employee base would reduce allocated corporate costs by $500,000. Pleasanton Studios has a cost of capital of 12 percent (and Kersten uses the cost of capital as their required rate of return) and are subject to 32% income taxes.

Before she can make any decisions, Kersten needs to evaluate this year’s performance results. She sets off to see you, the company’s accountant, for answers.

Table 1: Pleasanton Studios current year data

Required:

a. Evaluate this year’s performance results for the three divisions. Your financial analysis should include a segmented income statement for Pleasanton Studios, as well as the current annual ROI, residual income and EVA for the three divisions.

Embassy Publishing Company received a six-chapter manuscript for a new college text- book. The editor of the college division is familiar with the manuscript and estimated a 0.65 probability that the textbook will be successful. If successful, a profit of $600,000 will be realized. If the company decides to publish the textbook and it is unsuccessful, a loss of $200,000 will occur. Before making the decision to accept or reject the manuscript, the editor is consider- ing sending the manuscript out for review. The review cost $5000. A review process provides either a favorable (F) or unfavorable (U) evaluation of the manuscript. Past experience with the review process suggests that probabilities P(F) =0.7 and P(U)= 0.3 apply. Let s1 the textbook is successful, and s2 the textbook is unsuccessful. The editor’s initial probabilities of s1 and s2 will be revised based on whether the review is favorable or unfavorable. The revised probabilities are as follows: P(s1 |F) =0.75   P(s1 |U)= 0.417      P(s2 |F)= 0.25                   P(s2 |U)= 0.583

a. Construct a decision tree assuming that the company will first make the decision of whether to send the manuscript out for review and then make the decision to accept or reject the manuscript.

b. Analyze the decision tree to determine the optimal decision strategy for the publish- ing company.

c. What is the expected value of perfect information? What does this EVPI suggest for the company?

What changes in the city’s budgeting and accounting structure would overcome these limitations? What additional problems might these changes cause?

Government activities may be less “profitable” than they appear.

A city prepares its budget in traditional format, classifying expenditures by fund and object. In 2010, amid considerable controversy, the city authorized the sale of $20 million in bonds to finance construction of a new sports and special events arena. Critics charged that, contrary to the predictions of arena proponents, the arena could not be fiscally self‐sustaining. Five years later, the arena was completed and began to be used. After its first year of operations, its general managers submitted the following condensed statement of revenues and expenses (in millions):

At the city council meeting, when the report was submitted, the council member who had championed the center glowingly boasted that his prophecy was proving correct; the arena was “profitable.” Assume that the following information came to your attention:

• The arena is accounted for in a separate enterprise fund.

• The arena increased the number of overnight visitors to the city. City administrators and economists calculated that the additional visitors generated approximately $0.1 million in hotel occupancy tax revenues. These taxes are dedicated to promoting tourism in the city. In addition, they estimated that the ticket and concession sales, plus the economic activity generated by the arena, increased general sales tax revenues by $0.4 million.

• The city had to improve roads, highways, and utilities in the area surrounding the arena. These improvements, which cost $6 million, were financed with general obligation debt (not reported in the enterprise fund). Principal and interest on the debt, paid out of general funds, were $0.5 million. The cost of maintaining the facilities was approximately $0.1 million.

• On evenings when events were held in the arena, the city had to increase police protection in the arena’s neighborhood. Whereas the arena compensated the police department for police officers who served within the arena itself, those who patrolled outside were paid out of police department funds. The police department estimated its additional costs at $0.1 million.

• The city provided various administrative services (including legal, accounting, and personnel) to the arena at no charge at an estimated cost of $0.1 million.

• The city estimates the cost of additional sanitation, fire, and medical services due to events at the center to be approximately $0.2 million.