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peony
march 19/ june 19
The following is from the question:
the company launched a significant tv advertising campaign in may 20X5 in order to increase revenue. The directors have indicated that at the year end a current asset of 0.7m will be recognised as they believe that the advertisements will help to boost future sales in the next 12 months. The last advertisement will be shown on tv in early september 20X5.
The following is written in the answer:
The costs were incurred and adverts shown in the year ending 20X5 and there is not basis for including them as a current assets at the year end. The costs should be recognised in operating expenses in the current year financial statements.
If these costs are not expensed current assets and profits will be overstatedIt is not mentioned in the question that 0.7m is the advertising costs. Instead it seems that the 0.7m is the inflow from future sales in the next 12 months.
So why 0.7m have been considered as advertising costs
PLEASE provide a SUBJECT line that is more helpful to users of the forum – information in the forum does not need to be repeated in the post, so this is not something onerous that I ask.
There are 3 sentences in one paragraph – all of which include the word advertising or advertisements. The paragraph is describing how the directors are accounting for a cost (i.e. a Debit) – a current asset is also a Dr. I don’t think the examiner would expect it to be interpreted any differently but that instead of writing off $0.7m of expense, it is to be recofgnised as an asset.
The reference to future revenue is the grounds for carrying forward expense.
The receipt of 0.7m is not virtually certain. if 0.7m is recognised as a current asset, then current assets will be overstated and profit overstated
Is the above explanation for this audit risk also correct
Which explanation is better this one or the one given in the answer
The current asset is not recognising a future receipt – rather, the directors are treating the advertising expense incurred as a prepayment (that would be expensed in the next period).
The receipt of 0.7m is not virtually certain. if 0.7m is recognised as a current asset, then current assets will be overstated and profit overstated
So the above explanation for this audit risk is not correct
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