Accounting for ad campaigns:
The owner of a new restaurant has a costly ad campaign in the works for a new restaurant. The new place is still working out the buigs. They've only been open a month or so. The owner will dedicate the full advertising resources to the new restaurant for the next two months.
The company marketing director has suggested that the cost of the campaign be capitalized. In the past the company has used an expense-as-incurred approach to all marketing costs. The owner would like input on the capitalization scheme.
1. Given the focus of the campaign (introducing the new restaurant to the community), do you favor capitalizing the cost of the campaign? Why or why not?
2. What is the advertising industry's stance on the question? How do other courtiers handle the capitalization of marketing costs?
3. Industry figures indicate that advertising effectiveness declines at an annual rate of 20%. How does that statistic affect your recommendations to the owner?
4. If you choose to capitalize, select and defend your choice for amortization term and method.