Cutting Edge is a monthly magazine that has been on the market for 18 months. It is owned by a private company and has a circulation of 1.4 million copies. Negotiations are underway to obtain a bank loan in order to update its facilities. It is producing close to capacity and expects to grow at an average of 20% per year over the next three years. after reviewing the financial statements of Cutting Edge, Gary Hall, the bank loan officer, said that a loan could only be offered to Cutting Edge if it could increase its current ratio and decrease its debt-to-equity ratio to a specified level. Alexander Pang, the marketing manager of Cutting Edge, has devised a plan to meet these requirements. Pang indicates that an advertising campaign can be used to in1mediately increase circulation. The potential customers would be contacted after purchasing another magazine's mailing list. The can1paign would include:
1. An offer to subscribe to Cutting Edge at three-quarters the normal price
2. A special offer to all new subscribers to receive the most current world atlas whenever requested at a guaranteed price of $2.00
3. An unconditional guarantee of a full refund for any subscriber who is dissatisfied with the magazine Although the offer of a full refund is risky, Pang claims that few people will ask for a refund after receiving half of their subscription issues. Pang notes that other magazine companies have tried this sales promotion technique and experienced great success. Their average cancellation rate was 25%. On average, each company increased its initial circulation threefold and in the long run increased circulation to twice the level that it was before the promotion. In addition, 60% of the new subscribers are expected to take advantage of the atlas premium. Pang feels confident that the increased subscriptions from the advertising campaign will increase the current ratio and decrease the debt-to-equity ratio.
In addition to the above, Pang has just signed a large deal with a newly opened store to take delivery of the current edition of the magazine. The new customer has asked that the magazines be held by Cutting Edge for a couple of weeks to a month.
Instructions
Assume the role of the controller and discuss the financial reporting issues assuming that Cutting Edge uses ASPE.