Question

Chapter 3 Discussion Board You have recently been employed by a large clothing retailer. One of your tasks is to help prepare financial statements for external distribution. The company's lender, First Savings & Loan, requires that financial statements be prepared according to generally accepted accounting principles (GAAP). During the months of November and December 2021, the company spent $1 million on a major TV advertising campaign. The $1 million included the costs of producing the commercials as well as the broadcast time purchased to run them. Because the advertising will be aired in 2021 only, you charge all the costs to advertising expense in 2021, in accordance with requirements of GAAP. The company's chief financial officer (CFO), who hired you, asks you for a favor. Instead of charging the costs to advertising expense, he asks you to set up an asset called prepaid advertising and to wait until 2022 to record advertising expense. The CFO explains, 'This ad campaign has produced significant sales in 2021, but I think it will continue to bring in customers throughout 2022. By recording the ad costs as an asset, we can match the cost of the advertising with the additional sales in 2022. Besides, if we expense the advertising in 2021, we will show an operating loss in our income statement. The bank requires that we continue to show profits in order to maintain our loan in good standing. Failure to remain in good standing could mean we'd have to lay off some of our recent hires." REQUIREMENT 1: As a staff accountant, should you knowingly record advertising costs incorrectly if asked to do so by your superior? REQUIREMENT 2:

Answer 1

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Answer-

Ethical Dilemma about Advertising Expenses An ethical dilemma arise on an advertising expenses that whether to charge it full when incurred or wait till the expensed takes place first time. It is expensed when the related revenues will started recognized. The capitalization cost of advertising is amortized on a cost pool by pool basis or over the future benefits period.

In this case, an ethical dilemma was arise that whether to expense as full or treated as an asset and wait till the recognition of revenue generation. According to the GAAP principal, the general principal on Reporting on Advertising Costs”, an advertising costs are expensed except for direct response advertising. An advertising cost treated as expense when incurred or when the expense takes place first time. So, in the current case, as an employee I cannot record the knowingly incorrect entry. My answer would be same though it may save employee job. I cannot make an incorrect statement on the face that it can lead to save employee job.