Josephson and Associates is a consulting firm that spends $60,000 per year advertising the company's brand names and trademarks.Gross margin on sales after taxes is up $66,000 each year because of these advertising expenditures.For the purposes of this problem,assume that the firm makes all advertising expenditures on the first day of each year and that the $66,000 extra after-tax gross margin on sales occurs on the first day of the next year.Excluding any advertising assets or profits,
Josephson has $200,000 of other assets that have produced an after-tax income of $20,000 per year.Josephson follows a policy of declaring dividends each year equal to net income,and it has a cost of capital of 10 percent per year.
Required:
a.Is the advertising policy a sensible one? Explain.
b.How should accounting report the expenditures for advertising in Josephson's financial statements to reflect accurately the managerial decision of advertising at the rate of $60,000 per year? In other words,how can the firm account for the advertising expenditures in such a way that the accounting rate of return for the advertising project and the rate of return on assets for the firm reflect the 10-percent return from advertising?

Question

Quizplus · Accepted Answer

The Answer of Josephson and Associates is a consulting firm that spends $60,000 per year advertising the company's brand names and trademarks.Gross margin on sales after taxes is up $66,000 each year because of these advertising expenditures.For the purposes of this problem,assume that the firm makes all advertising expenditures on the first day of each year and that the $66,000 extra after-tax gross margin on sales occurs on the first day of the next year.Excluding any advertising assets or profits,
Josephson has $200,000 of other assets that have produced an after-tax income of $20,000 per year.Josephson follows a policy of declaring dividends each year equal to net income,and it has a cost of capital of 10 percent per year.
Required:
a.Is the advertising policy a sensible one? Explain.
b.How should accounting report the expenditures for advertising in Josephson's financial statements to reflect accurately the managerial decision of advertising at the rate of $60,000 per year? In other words,how can the firm account for the advertising expenditures in such a way that the accounting rate of return for the advertising project and the rate of return on assets for the firm reflect the 10-percent return from advertising?

Josephson and Associates Is a Consulting Firm That Spends $60,000