Case 6-4 Joan Holtz Essay Example

first year is valued more than earning more in the second year.  Justification for applying would be evidence of physical deterioration, obsolescence, drops in the price level, or other causes.

With these evidences, the inventory can be written down. 7. On the contrary belief of profits increasing, the four years of just storing the 200,000 gallons would reduce more and more profits every year. 200,000 x $0. 70 = $140,000 200,000 x $0. 20 = $40,000 200,000 x $0. 10 = $20,000.

Total Cost per Year: $200,000 So you would be reducing profits by at least $200,000 for the first year. Second-year would at least double because of the other additional 200,000 gallons produced that year, and so forth. These amounts would be accumulating for four years, quite a huge expense relative to the current annual earnings. On the side, if possible, they can get around all this profit reduction by charging barrels and warehousing to inventory rather than an expense.

This is all with accordance with SFAS 53 - Financial Reporting by Producers and Distributors of Motion Picture Films, there is the amortization and participation cost to be calculated. First Year Amortization: First-Year Actual Earned Revenue x Film Cost = First Year Amortization Estimated Ultimate Revenue First Year Participation Cost: First Year Actual Earned Revenue x Est. Ultimate Participation Costs = 1st Yr Part. Cost Estimated Ultimate Revenue A proper estimation needs to be made to calculate any of these formulas, which cannot be made with the information given. However, this would be the idea to calculate the cost of sales for the first year. They should update the estimate of ultimate revenue and participation cost at

each reporting date.

If the producing company agreed to pay $100,000 for advertising and promoting the initial showing, this would all go into the expense in accordance with SOP 93-7, none can be capitalized. So it would not change the answer mentioned above. *This was taken from the New York State Society of CPAs, the date of the implementation of this policy was in the year 2001. I couldn’t find the Canadian, IFRS, or a more recent article regarding financial accounting of film costs. This answer can be completely wrong as many changes could have happened up to now.