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The Car Company uses the accrual basis of accounting. The company is having a poor year financially. In September, 2012, the company paid $3 million for advertisements that will run during the World Series in September and October of 2012. The bonus of the CEO is based on net income with a maximum bonus of $200,000. The CEO wants the accountant to record the advertising as prepaid advertising since he feels strongly that the advertising will benefit the company in both 2012 and 2013. This way, the expenses for 2012 will be reduced and he may still be able to get his 2012 bonus. How and when should the company record the advertisement? What principle is used to determine when the expense should be recorded?
Expert Answer
The company should record expense in year 2012 only because it will run during 2012, so as per accrual concept of accounting company should record expense in year 2012 and should not record as prepaid. Prepaid expenses would have been in case the advertisment would have run in year 2013, in that case we would have recorded as prepaid.
But here the advertisment will run this year and as expense have been incurred this year company should record in 2012 itself.
Here the CEO’s motive is of selfish nature because of his bonus involved. Company’s do follow matching principle of accounting which means to offset revenue with expense incurred for generating that income.
