Question

Issue 3: Prepaid Advertising On November 1, 2018 ACE paid $30.000 in advance for eight months of advertising on radio station N3WZ, a local news station. The entry was recorded with a debit to prepaid advertising and a credit to cash. At December 31, 2018 ACE expensed $7,500 (debit to advertising expense and credit to prepaid advertising for 2 of the 8 months). Earlier, on December 29, 2018 ACE received a letter from N3WZ indicating that the radio station was changing its format on January 1, 2019 to "classic heavy metal." It will now use the call letters ROCK. Although ACE has no real data on this, it is management's impression that most heavy metal fans buy fewer networked computer systems than news station listeners. Accordingly, management attempted to cancel the agreement and receive a refund. Unfortunately, the contract for the advertising provides no assurances about a change in station format and ACE's lawyers say that obtaining any recovery in a court proceeding is doubtful. ROCK has refused any attempts at renegotiation and has suggested that ACE might be surprised at the number of customers that might respond to the commercials. ACE management still contends that very few, if any, listeners will respond to the advertisement. What entry or disclosure, if any, is necessary in this circumstance?

Answer 1

Solution:
It is a case where the entity has paid amount in advance for future which is recorded as prepaid but now the entity believes that future benefit would not be available. If the management is of the view that future benefit of this will not be available then they should expense off the remaining prepaid expense and charge to P&L/ Income statement
Below entry is suggested
31st December 2018
			Debit	Credit
Advertisement Expense			22500		(remaining amount of prepaid expense)
Prepaid Expense				22500
Disclosure in Notes to Accounts:
1. ACE did incur expense $ 30,000 on 1st November 2018 for advertainment over the period next 8 months however due to change in format of radio station, the management believe that future benefit will not be available and hence the entire amount is charged to advertainment expense in the current year
Alternative Answer:
As the radio station believes that there will be many customer from R0CK in comparison with N3WZ and if the management is convinced, they may decide not to post any adjustment entry or disclosure. However in the given case, the management is not convinced with Radio station view so the above solution would be more appropriate.