Slippery Slope, Inc., is a downhill ski area in northern New England. In an attempt to attract more ski enthusiasts, Slippery Slope’s management recently engaged in an aggressive preseason advertising campaign in which it spent $9,000 to distribute brochures, $17,000 to air broadcast media spots, and $14,000 to run magazine and newspaper ads.

Slippery Slope is now planning to borrow money from a local bank to expand its snowmaking capabilities next season. In preparing financial statements to be used by the bank, Slippery Slope’s management capitalized the entire $40,000 of advertising expenditures as Prepaid Advertising in the current year’s balance sheet. It decided to defer converting this asset to advertising expense for three years, arguing that it will take a least that long to realize the full benefit of its promotional efforts. Management also contends that it does not matter how the $40,000 advertising expenditure is reported, because the amount is immaterial.

Instructions

a. Does management’s decision to defer converting this $40,000 prepayment to advertising expense comply with generally accepted accounting principles? Defend your answer.

b. Could management’s decision to defer reporting this expenditure as an expense for three years have any ethical implications? Explain.