Question

Hi can anyone answer these for me before 12am tonight please!

1. Not only are you a brilliant accountant, you also have a knack for technology. Over time you’ve been developing an idea for an internet search engine and email service that would make the founders of Google green with envy. You’ve begun offering this service for free to everyone, but to start earning revenues you’ve had to spend a lot of money on advertising. Because of this, you need to arrange for some major financing. Of course, you want to present strong Financial Statements to the loan officer. In a stroke of genius, you’ve decided to use your advertising expenditures as assets. Please discuss why this is a violation of the matching rule. Please also let us know how the advertising expenditures should be handled and on which financial statement they can be found.

2. Please give an example of an adjusting entry complete with debits and credits and state why that adjustment is important for the fair presentation of the financial statements.

thank you!!

Answer 1

Solution:

1. The finance is very important for growth and expansion of the business. There are generally two sources of financing. If the external source of financing is selected in that case there are certain requirement which helps to build the trust in investors mind. The financial viability should be taken into consideration by the investors at the time of taking the investing decision. For this purpose the projected financial is need to prepare. Generally the projected financial statement is prepared for the five years. The statement shows the financial position of the business during the upcoming five years and what will be the growth of the business.

In the instant case the business expansion is depending upon the advertisement which requires a huge amount to invest. Now the question is coming that should the investment in the advertisement is treated as an asset or not. There is a concept in accounting known as deferred revenue expenditure. This concept states that if the benefit arises from any expenditure is stay more than years then the same is known as deferred revenue expenditure. The same expenditure is generally show in the assets side of the balance sheet and it is amortized throughout the life of such expenditure. In this case if the benefit from the advertisement is more than the one year then the expenditure is placed in the balance sheet. Suppose the total expenditure of the advertisement is $50,000 and it is expected that the benefit will stay for 5 years. So the amount comes in the financial statement in the end of 1^st year is like this,

In balance sheet = $[50,000-(50000/5)] = $40,000

In profit and loss account = $10,000 should be amortized.

1. The adjusting entry should be done for the amortization of the expenditure. The entry should be,

Particulars            Debit           Credit

            Profit & Loss a/c 10,000.00   

Advertisement a/c                  10,000.00

The importance of the same is not ignored for the fair value of the presentation of the financial statement. The total expenditure is amortize throughout the life of the expenditure for the purpose of the fair presentation and logically it’s right. Because the amount from which the benefit already arises should be write off. So as per the fair practice and for the better presentation it is required to adjust the advertisement expenditure at the end of the year through profit and loss account.

References:

Chauvin, K. W., & Hirschey, M. (1993). Advertising, R&D expenditures and the market value of the firm. Financial management, 128-140.

Hirschey, M., & Weygandt, J. J. (1985). Amortization policy for advertising and research and development expenditures. Journal of Accounting Research, 326-335.