GAAP and ethic for prepaid assets

timer Asked: Oct 4th, 2014

Question description

The ABC Theme Park & Resort is a new amusement park and holiday resort opened in the Township of ABC in early 2013.  To promote the park and resort facilities, management started an aggressive advertising campaign in which $900,000 was spent in printing and distributing brochures, $1,700,000 in television commercials and $1,400,000 in magazine and newspaper advertisement, for a total of $4,000,000. Now the company is planning to raise funds from bank borrowing for its water-world extension project, and is required to prepare financial statements for submission with the bank loan application.  Management decided to capitalize the full $4,000,000 of advertising expenditure in Prepaid Advertising in the 2013 Statement of Financial Position, and convert these into Advertising Expense over the next three years.  Management argued that it will take at least three years for the company to realize the full benefit of this aggressive advertising campaign.  Management also contends that it does not matter how this $4,000,000 advertising expenditure is report, because the amount is immaterial when compared to the park’s $12 billion annual operating budget.


- Discuss whether management’s decision to defer this $4 million advertising expenditure complies with generally accepted accounting principles?  Defend your answer. 

- Could management’s decision have any ethical implications?  Explain.

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