Question

Pewter Publishing Co. (PPC) prepares and publishes a monthly newsletter for an industry in which potential circulation is limited. Because information provided by the newsletter is available only piecemeal from other sources and because no advertising is carried, the subscription price for the newsletter is relatively high. To increase circulation, PPC recently purchased a contact list from the industry’s trade association for $110,000. PPC then engaged in a campaign to increase circulation. The campaign involved extensive use of long distance telephone calls to industry members on the list who were not current subscribers. The telephone cost of the campaign was $38,000, plus salary payments to individuals who made the calls amounting to $51,000.
As a direct result of the campaign, new one year subscriptions at $175 each generated revenue of $294,100. New three year subscriptions at $450 each generated revenue of $224,700, and new five year subscriptions at $625 each generated $187,500. Cancellations are rare, but when they occur, refunds are made on a half rate basis (e.g., if a subscriber has yet to receive $100 worth of newsletters, $50 is refunded).
The subscription campaign was conducted during August 20X0. New subscriptions began with the October 20X0 issue of the monthly newsletter. The company’s accounting year ends 31 December.

 

Required:

Identify the specific accounting issues involved in recognizing revenue and costs for PPC. Calculate the related assets, liabilities, revenue, and expenses that would be reported by the company for 20X0 on its SFP and SCI.

Answer 1

The 20X0 subscription campaign yielded a total of $706,300 (294,100 + 224,700 + 187,500) in new subscriptions. The revenue from these subscriptions should be recognized over the term of the subscriptions, as the “product” is delivered to the subscribers. There is a slight risk of non-payment, and therefore an allowance for doubtful accounts should be established as a valuation account for accounts receivable.

 

As at December 31, 20X0, the following revenue amounts are calculated:

 

Length of subscription	Total subscription revenue $	Months of revenue earned Number of months Oct - Dec	Revenue recognized $	Unearned Revenue $
One year	294,100	3/12	73,525	220,575
Three year	224,700	3/36	18,725	205,975
Five year	187,500	3/60	9,375	178,125
	706,300		101,625	604,675

 

Total revenue to be recognized in 20X0 was $101,625.

 

The costs fall into four categories:

 

1.      $110,000 for the subscription list

2.      $89,000 in direct costs for the subscription campaign x telephone and direct salary expense

3.      The costs of actually producing the newsletter.

 

If the newsletter production costs are not high, the new subscription revenue clearly will exceed the cost of the subscription campaign; the campaign costs will result in a net benefit to the company. The accounting issue is:

Which (if any) of these costs can be deferred and amortized, or should they all be expensed in Year 0?

 

The subscription list is a purchased intangible asset. It has resulted in increased revenue, and if a reasonable proportion of subscriptions are renewed, then it will have future benefits as well. A strong argument can be made for capitalizing the purchased list as an intangible capital asset. Subscription lists are usually amortized and are subject to impairment tests. In this case, an impairment test can be based on the actual renewal rate when it is known in future years.

 

The direct costs of the subscription campaign must be expensed as incurred since any future benefits are unclear and they are not clearly tied to getting the contracts. Such costs are viewed as being costs of maintaining or enhancing the entity’s internal goodwill and should be expensed when incurred. The company will continually be incurring costs to develop its subscription base, and this campaign was just one of a potential series of such initiatives. Therefore, these costs are expensed.

 

The bulk of the production costs will be incurred when the newsletter is produced, and should be expensed as the revenue is recognized. Some costs (e.g., editorial salaries; information-gathering costs) are incurred in advance of the publication date. Many costs will have been incurred in 20X0 for 20X1 issues, but these are continuing operating costs. They should be expensed when incurred.