Loaddown.com

Your friend, Heza nerd, has jumped on the music-downloading bandwagon and come up with a concept that he believes can make him a lot of money. He has set up a website Loaddown.com that people can visit to download songs for a small fee. After signing up, the user receives a login name and password and is allowed to download any five songs for free. After that, there are three subscription plans: 1. Pay as you go the users account is charged $1 for every song downloaded from the site. 2. Monthly for $50 per month the use can download up to 75 songs per month. For the 76th song and beyond, the charge is $1 per song. 3. Annually for $500 per year, the user can download up to 1,000 songs per year. The monthly and annual plans must be paid in full up front before the first song can be downloaded. Loaddown.com has signed a deal with a major music distributor to use its songs exclusively. Loaddown.com will pay a monthly fee of $20,000 on the 1st of every month as well as a per song fee of $0.30 for every song downloaded. The per song free will be payable to the distributor on the 15th of every month and will pay for the songs downloaded the previous month. (i.e. February 15th will be for songs downloaded in January). To set up the site, Heza had to borrow $100,000 from the bank. Most of this load was spent buying the necessary hardware and paying the salaries of the software developers he had to hire. Because Heza is a computer guy with no background in running a business, he hired Jim Dandy, and MBA graduate, to manager the operations. Jim believes so strongly in the venture that he has agreed to a compensation package consisting of a minimal salary plus a bonus based on the net income number on the annual income statement.

Required:

Heza has contacted you for help in establishing some policies to guide the accounting for Loaddown.com. Specifically, he wants you to answer the following questions:

1. Who will be the main users of Loaddown.coms financial statements? What will each use the financial statements for?

2. What are the objectives of each of the users identified in 1?

3. What revenue and expense recognition policies would satisfy each of the objectives in 2?

4. Which of the policies in 3 would be most appropriate for Loaddown.com? Explain why.