Question

PSI, Inc. is in the process of developing a significant television advertising campaign. Shortly before the company’s fiscal year-end of December 31, PSI, Inc. received and paid a $50,000 invoice from the production company that was just finishing production of the commercials, which will air in the month of January. The CFO believes they should incur the production expense immediately; however, the controller believes they should record a prepaid expense now, then expense the production costs along with the rest of the advertising costs next year when the commercials are actually used.

Part of the controller’s argument is that the invoice came during the production process. While the shooting had all been finished, the commercials still needed final editing and processing. Since the production was not yet complete, she argued, we can defer the costs until next period when the production company actually delivers the final commercials.

The CFO disagrees, since PSI is not doing the production in-house, she said, they should record the expense when payment is made.

Questions                                                           

Answer all of the following questions:

• When should PSI record the cost of creating the commercials?
• When should PSI record the cost of showing the commercials?
• What journal entry, if any, should they make this year?

Answer 1

1. PSI can record the cost of creating the commercials at the time when PSI received and paid the invoice.

2. PSI can record the cost of showing the commercials only next year because the amount pertains only to the next period even though invoice is received and paid this year.