Question

1. On January 1^st, 2014, Gloucester Inc. paid $4,500 for an advertising campaign. $3,000 of this amount related to TV adds shown on TV during 2014, and the remaining $1,500 relates to adds that will only be shown in 2015. Gloucester recorded the full amount paid as an asset (advertising). However, the company assumes that this asset is equally consumed over 3 years, recording one-third expense in 2014. As a result, for fiscal year 2014, Net Income is (overstated, understated, correct) and if wrong by how much:

Answer 1

Amount spent for advertising campaign = $4,500

$3,000 of this amount related to TV adds shown on TV during 2014, and the remaining $1,500 relates to adds that will only be shown in 2015

Hence, Advertising expense for the year 2014 = $3,000

However, the company recorded only one-third as an expense in the year 2014.

Advertising expense recorded by the company for the year 2014 = Amount spent for advertising campaign x 1/3

= 4,500 x 1/3

= $1,500

Thus, Advertising expense was understated by the company for the year 2014 by = Advertising expense for the year 2014 - Advertising expense recorded by the company for the year 2014

= 3,000 - 1,500

= $1,500

As a result, for fiscal year 2014, Net Income is overstated by = $1,500

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