Star Enterprises Ltd is a company formed to manage the affairs of a successful pop group. All the group’s revenue and expenses are recorded in the company’s books. The group’s recording contract with IME Records stipulates a payment of advance royalties of £50,000 on the recording of a record. Actual royalties are 50p per record. Any sales in excess of 100,000 copies will result in additional royalties being paid. If sales are less than 100,000, then any excess advance is recouped from future payments.

During the year ended 31 March 20X1 the company received the following royalties:

Record 3 was recorded and released shortly before the year end. No sales figures are yet available.

The company has also incurred advance expenditure of £35,000 on promoting a tour the group will undertake during April 20X1.

Required:

(a) State the accounting principles which are used in revenue and expense recognition.

(b) Write a report to the management of the company advising on the treatment of royalties and advance expenditure, and showing how these items will be treated in the accounts to 31 March 20X1.

Transcribed Image Text:

Advance Record 1 50,000 Advance Record 2 50,000 Less: Shortfall on Record 1 17,000 33,000 Additional royalties Record 2 44,000 Advance Record 3 50,000