Escolar Documentos
Profissional Documentos
Cultura Documentos
Problems
Problem 6-1
The completed table is shown below. Each deduction involves the basic inventory equation.
Ending inventory = Beginning Inventory + Purchase Shipments (COGS)
as well as the basic relationships inherent in any income statement, that is:,
Anthony/Hawkins/Merchant
Co. W
Co. X
Co. Y
Co. Z
Sales......................................................................................................................................................................................
$2,250
$1,800
$1,350
$2,100
Cost of goods sold:................................................................................................................................................................
Beginning inventory.........................................................................................................................................................
300
225
500
300
Plus: Purchases.................................................................................................................................................................
975
975
850
1,200
Less: Ending inventory.....................................................................................................................................................
225
300
300
150
Cost of good sold.........................................................................................................................................................
1,050
900
1,050
1,350
Gross margin.........................................................................................................................................................................
1,200
900
300
750
Period expenses.....................................................................................................................................................................
300
400
150
800
Net income (Loss).................................................................................................................................................................
$ 900
$ 500
$ 150
$ (50)
Problem 6-2
The required income statement is reproduced below.
The closing entries are:
a.
b.
dr. Inventory.........................................................................................................................................................
167,000
cr. Purchases....................................................................................................................................................
167,000
c.
dr. Inventory.........................................................................................................................................................
4,000
cr. Freight-in....................................................................................................................................................
4,000
d.
e.
f.
g.
h.
i.
dr. Sales................................................................................................................................................................
325,000
cr. Income Summary........................................................................................................................................
325,000
j.
GARDNER PHARMACY
Income Statement for the Year ----.
Sales...............................................................................................................................................................................
$325,000
Cost of goods sold:.........................................................................................................................................................
Beginning inventory.................................................................................................................................................
$ 50,000
Plus: Purchase, gross........................................................................................................................................
$167,000
2007 McGraw-Hill/Irwin
Chapter 6
Freight-in...................................................................................................................................
4,000
171,000
Less: Purchase returns.........................................................................................................................
8,000
Net purchases..............................................................................................................................................
163,000
Goods available for sale..............................................................................................................................
213,000
Less: Ending inventory........................................................................................................................
77,500
Cost of goods sold.............................................................................................................................
135,500
Gross margin.....................................................................................................................................................
189,500
Other expenses..................................................................................................................................................
95,000
Income before taxes..........................................................................................................................................
94,500
Income tax expense...........................................................................................................................................
28,350
Net income........................................................................................................................................................
66,150
Problem 6-3
a.
dr. Inventory.......................................................................................................................................
85,500
cr. Cash (or Payables)....................................................................................................................
85,500
GOULDS COMPANY
Income Statement
Gross sales..........................................................................................................................................
$133,400
Less: Sales returns........................................................................................................................
1,840
Net sales................................................................................................................................
$131,560
Cost of goods sold........................................................................................................................
85,800
Gross margin................................................................................................................................
$ 45,760
c. The perpetual inventory records indicate ending inventory should have been 673 + 5,700 5,800
+ 80 = 653 units. Inventory shrinkage has therefore been 653 610 = 43 units.
$14 =
$12 =
$12.80 =
$ 700
900
$1,600
Anthony/Hawkins/Merchant
Avg. Cost
Fifo
Lifo
July 31 inventory............................................................................................................................................................................
$ 320
$ 300
$ 350
Cost of goods sold..........................................................................................................................................................................
1,280
1,300
1,250
Available for sale...........................................................................................................................................................................
1,600
1,600
1,600
Problem 6-5
a.
Fifo
Av. Cost
Lifo
Sales.....................................................................................................................................................................................
$52,125
$52,125
$52,125
Cost of goods sold................................................................................................................................................................
27,310
27,053
26,960
Gross margin........................................................................................................................................................................
$24,815
$25,072
$25,165
Fifo
Av. Cost
Lifo
b.
Gross margin percentage......................................................................................................................................................
47.6%
48.1%
48.3%
c. Net cash flow = $21,465 ($52,125 - $30,660)
No change in pretax cash flow figure using different inventory methods.
d.
Fifo
Av. Cost
Lifo
Pretax cash flow...................................................................................................................................................................
$21,465
$21,465
$21,465
Tax payment
7,445
7,522
7,550
.................................................
.............................................................................................................................................................................................
After-tax cash flow...............................................................................................................................................................
$14,020
$13,943
$13,915
The tax payment in 30 percent of the gross margin dollars. The cash flow using Fifo for tax purposes is
the lowest of the three after tax cash flow amounts because the unit cost of computers is falling,
producing the highest taxable gross margin of the three methods.
Problem 6-6
a. Ending inventory balances are:
Materials
Work in
Finished
Inventory
Process
Goods
Beginning balance........................................................................................................................................................
$ 100,000
$ 370,000
$
60,000
(1) Purchases......................................................................................................................................................................
872,000
Delivery charge............................................................................................................................................................
22,000
(2) Direct labor...................................................................................................................................................................
565,000
(3) Materials transfer..........................................................................................................................................................
(900,000)
900,000
(4) Indirect labor................................................................................................................................................................
27,000
Factory supplies............................................................................................................................................................
46,000
Depreciationfactory....................................................................................................................................................
54,000
Factory utilities.............................................................................................................................................................
147,000
DepreciationMfg........................................................................................................................................................
46,000
Property taxes...............................................................................................................................................................
14,000
(5) Finished goodstransfers..............................................................................................................................................
________
(2,035,000)
2,035,000
$ 94,000
134,000
2,095,000
Cost of goods sold........................................................................................................................................................
--(2,002,000)
Ending balance.............................................................................................................................................................
$ 94,000
$ 134,000
$
93,000
b. Gross margin was 23 percent.
4
2007 McGraw-Hill/Irwin
Chapter 6
Sales................................................................................................................................................................
$2,600,000
Cost of goods sold...........................................................................................................................................
2,002,000
Gross margin...................................................................................................................................................
$ 598,000
Problem 6-7
Item
A
B
C
D
Units
30
40
20
40
Valuation
Basis/Unit
$145
173
131
113
Historical
Cost/Unit
$150
183
134
113
Total adjustment
Total
Adjustment
$150
400
60
0
$610
Cases
Case 6-1: Browning Manufacturing Company*
Note: This case is updated from the Eleventh Edition.
Approach
This is a straightforward complete accounting cycle in a manufacturing company, although it is
considerably longer than previous cases of the same type. Students may find it helpful to refer back to the
journal entries described in the text as a guide. Tracing through these entries is intended to give the
student an understanding of what goes on in a manufacturing company and how these events are reflected
in the accounts. I make a concerted attempt to link the problems numbers to Illustrations 6-3 and 6-4 in
the text, placing the T-accounts side-by-side (if board space permits) and using arrows to denote flows
from one inventory account to another.
Simply because of its length, two days may be necessary for this case. In any event, it is desirable that
some time be left for Question 3, which asks the students to use the information they have built up.
In effect, this case is a miniature practice set and can be treated as such if desired. It is a key case.
Comments on Questions
Question 1
1.
Accounts Receivable...........................................................................................................................
2,562,000
Sales (Retained Earnings).............................................................................................................
2,562,000
Sales Returns and Allowances (R/E)
19,200
..............................................................................
............................................................................................................................................................
Accounts Receivable....................................................................................................................
19,200
Sales Discounts (R/E).........................................................................................................................
49,200
Accounts Receivable....................................................................................................................
49,200
This Teaching note was prepared by Robert N. Anthony. Copyright Robert N. Anthony.
2.
(a)
(b)
Anthony/Hawkins/Merchant
Since in a manufacturing company, inventory is assumed to increase in value by the amounts spent to
convert materials into salable products, the following entry should be made; or the debit entry above
could have been made to Work in Process Inventory directly, as is done in the T-accounts to follow.
(c)
3.
4.
5.
6.
7.
8.
9.
2007 McGraw-Hill/Irwin
10.
Chapter 6
Bal.
Cash
118,440
(2)
264,000
(2)
2,604,000
(2)
(2)
(6)
(6)
(8)
(8)
(9)
(10)
________
Bal.
2,986,440
149,640
144,000
78,000
874,800
522,000
300,000
38,400
788,400
9,000
52,200
30,000
149,640
2,986,440
Bal.
Materials Inventory
110,520
(3)
811,000
825,000 Bal.
124,520
935,520
935,520
124,520
Bal.
(4)
Bal.
(2)
Bal.
(2)
Bal.
Supplies Inventory
17,280
(3)
66,000 Bal.
83,280
22,080
61,200
22,080
83,280
Bal.
2,158,992
352,368
Anthony/Hawkins/Merchant
2,158,992
Bal.
(2)
Bal.
(8)
Ba1.
Bal.
(6)
Bal.
Accumulated Depreciation
1,047,600 Bal.
907,200
________
(3)
140,400
1,047,600
1,047,600
Bal. 1,047,600
(8)
Bal.
Accounts Payable
788,400 Bal.
185,760
288,350
(2)
825,000
________
(2)
66,000
1,076,760
1,076,760
Bal.
288,360
Capital Stock
Bal.
(1)
(1)
(2)
(5)
(6)
(9)
(10)
Bal.
1,512,000
Manufacturing Plant
2,678,400 Bal. 2,822,400
144,000
________
2,822,400
2,822,400
2,822,400
Notes Payable
300,000 Bal.
252,840
(6)
552,840
Bal.
288,840
264,000
552,840
252,840
9,000
5,800
14,800
5,800
Retained Earnings
19,200 Bal.
829,560
49,200
(1) 2,562,000
522,000
1,806,624
38,400
58,000
30,000
868,136
________
3,391,560
3,391,560
Bal.
868,136
6. It is planned to reduced notes payable. Whether this is wise may depend on the notes payable interest
vis--vis the return being earned on marketable securities.
7. Additions to plant are slightly greater than depreciation expense. This is not unusual in an inflationary
era.
8. The accounts receivable balance will decline by about 35 percent even though there is an expected
increase in sales. Is the collection department being overly optimistic about collections on account?
BROWNING MANUFACTURING CORPORATION
Projected Balance Sheet as of December 2006
Assets
Current Assets
Cash and marketable securities................................................................................................................................................
$ 449,640
Accounts receivable (net)........................................................................................................................................................
201,360
Inventories:..............................................................................................................................................................................
Materials............................................................................................................................................................................
$124,520
Work in process.................................................................................................................................................................
210,448
Finished goods..................................................................................................................................................................
352,368
2007 McGraw-Hill/Irwin
Chapter 6
Supplies
22,080
709,416
........................................................................
..............................................................................................................................................................................
Prepaid taxes and insurance.........................................................................................................................................
91,920
Total current assets...............................................................................................................................................
$1,452,336
Manufacturing plant....................................................................................................................................................
2,822,400
Less: Accumulated depreciation...........................................................................................................................
( 1,047,600)
1,774,800
Total assets.....................................................................................................................................................
$2,927,136
Liabilities and Shareholders Equity
Current liabilities
Accounts payable
$ 288,360
Notes payable
252,840
Income taxes payable
5,800
Total current liabilities
$ 547,000
Shareholders equity:
Capital stock
1,512,000
Retained earnings
868,136
2,380,136
Total Liabilities and Shareholders Equity
$2,927,136
Anthony/Hawkins/Merchant
10
2007 McGraw-Hill/Irwin
Chapter 6
COGS
Inventory
LIFO:
COGS
2005
1,840
600
380
2,820
@
@
@
@
$20.00
20.25
21.00
=
=
=
$36,800.00
12,150.00
7,980.00
$56,930.00
420
400
200
1,020
@
@
@
21.00
21.25
21.50
=
=
=
8,820.00
8,500.00
4,300.00
$21,620.00
200
400
800
600
@
@
@
@
$21.50
21.25
21.00
20.25
=
=
=
=
$4,300.00
8,500.00
16,800.00
12,150.00
This Teaching note was prepared by Robert N. Anthony. Copyright Robert N. Anthony.
11
AVERAGE COST:
Anthony/Hawkins/Merchant
820
2,820
20.00
16,400.00
$58,150.00
Inventory
1,020
20.00
$20,400.00
COGS
2,820
$20.456 =
$57,685.92
Inventory
1,020 @
20.456 =
$20,865.12
Note in all three cases that the sum of the cost of goods sold and ending inventory amounts is the same:
$78,550 (slightly different with average cost because of rounding errors), which is the sum of the
beginning inventory and purchases (i.e., available for sale).
FIFO:
LIFO:
AVERAGE COST:
FIFO:
2006
420
400
200
700
700
660
3,080
@
@
@
@
@
@
$ 21.00
21.25
21.50
21.50
21.50
22.00
=
=
=
=
=
=
$ 8,820.00
8,500.00
4,300.00
15,050.00
15,050.00
14,520.00
$66,240.00
Inventory
40
1,000
1,040
@
@
@
22.00
22.25
=
=
COGS
1,000
700
700
680
3,080
@
@
@
@
$ 22.25
22.00
21.50
21.50
=
=
=
=
$22,250.00
15,400.00
15,050.00
14,620.00
$67,320.00
Inventory
20
1,020
1,040
@
@
@
$ 21.50
20.00
20.00
=
=
=
COGS
3,080
$21.509
$66,247.72
Inventory
1,040
21.509
$22,369.36
2007
40
1,000
1,000
700
210
2,950
@
@
@
@
@
$ 22.00
22.25
22.50
22.75
23.00
=
=
=
=
=
@
@
23.00
23.50
=
=
$11,270.00
16,450.00
$27,720.00
COGS
COGS
Inventory
490
700
1,190
12
880.00
22,250.00
$23,130.00
430.00
20,400.00
$20,830.00
880.00
22,250.00
22,500.00
15,925.00
4,830.00
$66,385.00
2007 McGraw-Hill/Irwin
LIFO:
Chapter 6
COGS
700
700
700
850
2,950
1,020
@
@
@
@
$23.50
23.00
22.75
22.50
=
=
=
=
20.00
$16,450.00
16,100.00
15,925.00
19,125.00
$67,600.00
$20,400.00
20
150
@
@
21.50
22.50
=
=
430.00
3,375.00
COGS
1,190
2,950
$22.547
$24,205.00
$66,513.65
Inventory
1,190
22.547
$26,830.93
Inventory
AVERAGE COST:
COGS
Inventory
2005
2006
2007
2007
Check on Calculations
FIFO
$ 56,930
66,240
66,385
27,720
$217,275
LIFO
$ 58,150
67,320
67,600
24,205
$217,275
AVG.COST
$ 57,685.92
66,247.72
66,513.65
26,830.93
$217,278.22
Question 2
The calculation of the $1,406 tax difference for 2005-07 is shown below. However, this difference is
really irrelevant for deciding what to do in future years.
2005
2006
FIFO
LIFO
Sales.............................................................................................................................................................
$95,880
$95,880
COGS...........................................................................................................................................................
56,930
58,150
Gross Margin...............................................................................................................................................
38,950
37,730
Tax Expense.................................................................................................................................................
15,580
15,092
Net Income...................................................................................................................................................
$23,370
$22,638
Sales.............................................................................................................................................................
$110,110
$110,110
COGS...........................................................................................................................................................
66,240
67,320
Gross Margin...............................................................................................................................................
43,870
42,790
Tax Expense.................................................................................................................................................
17,548
17,116
Net Income...................................................................................................................................................
$ 26,322
$ 25,674
2007
Sales.............................................................................................................................................................
$105,462.50
$105,462.50
COGS...........................................................................................................................................................
66,385.00
67,600.00
Gross Muffin................................................................................................................................................
39,077.50
37,862.50
Tax Expense.................................................................................................................................................
15,631.00
15,145.00
Net Income ..................................................................................................................................................
$ 23,446.50
$ 22,717.50
Total Tax Expense Savings:
2005
$ 488
2006
432
2007
486
$1,406
13
Anthony/Hawkins/Merchant
An easier approach, which most students will overlook, is to note that the three-year difference in COGS
is $3,515, and 40 percent of this is $1,406. Even easier, but much more subtle, is realizing that the threeyear COGS difference is equal to the difference in 2007 year-end inventories ($27,720 - $24,205 =
$3,515).
Question 3
Purchases for 2008 forecasted at 1,910* cartons @ 24.00
FIFO
COGS
Inventory
LIFO:
COGS
Inventory
490
700
1,510
2,700
@
@
@
$23.00
23.50
24.00
=
=
=
$11,270
16,450
36,240
$63,960
400
$24.00
$9,600
1,910
150
20
620
2,700
@
@
@
@
$24.00
22.50
21.50
20.00
=
=
=
=
$45,840
3,375
430
12,400
$62,045
400
20.00
$8,000
FIFO
LIFO
2008 Sales (2,700 @ $35.75)..................................................................................................................................................
$96,525
$96,525
COGS...............................................................................................................................................................................
63,960
62,045
Gross margin.....................................................................................................................................................................
32,565
34,480
Tax expense .....................................................................................................................................................................
13,026
13,792
Net income .......................................................................................................................................................................
$19,539
$20,688
In 2008, LIFO would cause an increase in tax expense of $766.
Question 4
The LIFO reserve is the difference between inventory calculated under the FIFO method, and inventory
calculated under the LIFO method.
2005
2006
LIFO Reserve
$1,220
$2,300
=
=
=
FIFO Inventory
$21,620
$23,130
LIFO Inventory
$20,400
$20,830
Another way to look at the LIFO reserve is that it represents the cumulative difference between LIFO cost
of goods sold and FIFO cost of goods sold. We can see that in 2005, the LIFO reserve ($1,220) is equal to
the difference between LIFO cost of goods sold and FIFO cost of goods sold ($58,150 - $56,930 =
$1,220). Similarly, in 2000, the LIFO reserve ($2,300) is equal to the sum of the differences between
LIFO and FIFO cost of goods sold for 2005 and 2000, as shown on the next page.
14
2007 McGraw-Hill/Irwin
Chapter 6
2005
2006
LIFO cost of goods sold..............................................................................................................................................
$58,150
$67,320
FIFO cost of goods sold..............................................................................................................................................
56,930
66,240
Difference...................................................................................................................................................................
$ 1,220 +
$ 1,080 = $2,300
Therefore, if you are given LIFO cost of goods sold and inventory, and you are also given the LIFO
reserve for that year (year X) and the previous year (year X-1), you can estimate the following:
FIFO inventory (year X) = LIFO inventory (year X) + LIFO reserve (year X)
FIFO COGS (year X) = LIFO COGS (year X) - [LIFO reserve (year X) - LIFO reserve (year X-l)]
Tax savings (year X) = [LIFO reserve (year X) - LIFO reserve (year X-1)] *(1 tax rate)
Cumulative tax savings due to the use of LIFO = LIFO reserve (year X)
Most companies on LIFO report the LIFO reserve in their financial statements, often in the inventory
footnote. Understanding the significance of the LIFO reserve can be very useful when trying to compare
the financial performance of companies using different inventory accounting methods.
Question 5
See Why More LIFO? section of the text, plus comments earlier in this note.
Case 6-3: Morgan Manufacturing*
Note: Updated from Eleventh Edition.
Morgan Manufacturing is a straightforward case to illustrate how information on the LIFO Reserve can
be used to adjust the results of a company on LIFO to make them more comparable to those of a company
on FIFO. This case extends the learning developed in question 4 of Case 6-2, Lewis Corporation. Morgan
Manufacturing may not require a full class for discussion, and the instructor may want to assign it in
conjunction with Lewis Corporation.
Answers to questions:
1. Westwoods gross margin percentage = $900 divided by $2,000 = 45%; pretax return on sales = $300
divided by $2,000 = 15%; pretax return on assets = $300 divided by $2,240 = 13.4%.
2. Students will quickly recognize that both the inventory and the cost of goods sold accounts are
affected. You are likely, however, to have to guide them to recognize what other accounts and
financial items are also affected. For example, if inventory is affected, then some other balance sheet
account must be affected to keep the balance sheet balanced. Students will likely conclude it must be
retained earnings or owners equity. If cost of goods sold is affected, then clearly items such as gross
margin, pretax net income, tax expense and net income will also be affected. Typically, assuming the
norm of continuing inflation and growing inventory, LIFO produces higher cost of goods sold and
lower inventory, owners equity, gross margin, pretax net income, tax expense, and net income than
FIFO. It is possible, therefore, for two companies to have identical underlying economic
performance, but the financial measures of performance of the firm using the LIFO method will look
worse than the financial measures of the firm using the FIFO method (or the underlying economic
performance of the LIFO firm might be even better than that of the FIFO firm, and the LIFO firms
financial measures can still look worse!).
3. Adjustment to 2006 inventory: $100 LIFO inventory + $70 LIFO reserve = $170 FIFO inventory.
*
This teaching note was prepared by Julie H. Hertenstein. Copyright Julie H. Hertenstein.
15
Anthony/Hawkins/Merchant
$70
-10
$60
16
2007 McGraw-Hill/Irwin
Chapter 6
statement. Others may argue that the tax expense should be unchanged, reflecting the fact that the LIFO
company paid lower taxes due to its choice of the LIFO inventory accounting method, a true economic
difference between the two firms.
Following the conceptual discussion, the actual calculations can be examined and the results posted on
the board, as shown in Exhibit 1. From these results, students will quickly observe that Morgans
performance was better on all three measures. They may also conclude that the productivity
improvements that Charles Crutchfield had implemented were, indeed, reflected in Morgans financial
performance measures.
Exhibit 1
Gross Margin %
Pretax Return on Sales Pretax Return on Assets
Morgan (LIFO)..................................................................................................................................................................
44.5%
14.5%
13.4%
Westwood (LIFO)..............................................................................................................................................................
45.0%
15.0%
13.4%
Morgan (Adjusted)............................................................................................................................................................
47.5%
17.5%
15.6%
Case 6-4: Joan Holtz (B)*
Note: In discussing some of these questions. it may be useful to construct simple numerical examples,
perhaps related to the illustrations in the text. Joan Holtz (B) is an extension of Joan Holtz (A) in
Chapter 5. The case is unchanged from the Eleventh Edition.
1. The ultimate effect, over the life of an entity, is the same under all three methods. For a given
accounting period, however, the methods result in different net income. If purchase discounts are
deducted from purchases, they reduce the net purchase costs, and affect net income in the period in
which the goods are sold. If reported as other income of the period, they affect net income in an
earlier period than in the first method. If discounts not taken are recorded as an expense, cost of goods
sold reflects the full amount of the discount, and discounts not taken decrease income in what is
perhaps a later period.
Another difference is that cost of goods sold, and hence the gross margin percentage, differs under
each of these methods.
Of course, the amounts involved are usually small, so the above differences often are not material
2. There should be a credit to Inventory, to reduce it to the amount found from the physical inventory.
The debit may be either to Cost of Goods Sold or to an operating expense item. Literally, the
shrinkage cost could not have been a cost of the goods that actually were sold, for these goods were
not sold. The practice of debiting of Cost of Goods Sold is often followed, however. For management
purposes, it is desirable to identify the amount of shrinkage, wherever it is reported.
3. It is incorrect to say that the LIFO method assumes anything about the physical flow of the goods.
LIFO advocates know that physically the goods tend to move on a FIFO basis. LIFO is based on a
belief about economic flows, as explained in the text.
4. In the examples given, the economics of the operations of the automobile dealer are best reflected by
the FIFO method (or even better by the specific identification method, which probably approximates
FIFO), and the economics of the operations of the hardware dealer are best reflected by the LIFO
method. Even so, the automobile dealer would not necessarily be wrong to use LIFO; it might regard
the income tax savings as being more important than a correct showing of economic income.
*
This teaching note was prepared by Robert N. Anthony. Copyright Robert N. Anthony.
17
Anthony/Hawkins/Merchant
Barrels @ $0.70..........................................................................................................................................
$140,000
Warehousing @ $0.20................................................................................................................................
40,000
Interest @ $0.10..........................................................................................................................................
20,000
On each gallon added to inventory, the warehousing and interest costs would cumulate for four years,
and profits would be decreased correspondingly.
The argument against including these costs in inventory is that they are not costs of producing
whiskey. The production process has been completed before the whiskey is stored. The contrary
argument is that these costs are incurred in order to bring the whiskey to a salable condition and they
therefore should be included as inventory cost. This argument is strongest for the barrels, and next
strong for the warehousing costs. Many people argue that in no circumstances can interest be
considered a cost of production; rather, it is a cost of financing. Yet, if this were a four-year
construction project rather than aging whiskey, GAAP would require capitalization of construction
debt financing costs. (This is not described in the text until Chapter 7.) In any event, unless these
costs are included in inventory, profits will decrease at the very time that the increase in production
indicates that the company is prospering.
8. There is now a rule (from FASB-53) for determining cost of sales for T.V. movies. It is to amortize
film cost in the ratio of
Gross revenue for the film for the current period
Anticipated total gross revenues for the film from
the beginning of the current period until the end
of its useful life
The denominator of this ratio must be reviewed periodically to reflect current information. The new
ratio is then applied to unrecovered film costs. Arguments can be made for ratios of 10/13 or 10/16 in
the first year. The 10/16 ratio ($625,000) is perhaps better due to the belief that at least $300,000 in
revenue will come from reruns. Correspondingly, the ratio to be used in the second year would be 1/2
($300,000/$600,000). This would result in amortization of $187,500 in year two [1/2 x ($1,000,000 $625,000)], with the final $187,500 of cost matched against the final $300,000 of revenue. The
$100,000 spent on advertising and promotion of the initial showing does not benefit the future
showings of the film. This is therefore not a capitalizable cost and should be expensed in the period
incurred. Therefore it does not affect the ratios used above.
18