On December 15, 2019, Juan Gonzlez, controller of Keiser Industries, was reviewing several reports on production costs for 2019. A number in these reports caught his attention and worried him: the cost of advertising.

During October, the company began an expensive advertising campaign to sell some of its smaller products. It is still too early to know if the advertising campaign was successful. There has been much internal debate about how to report advertising costs.

Some argue that advertising costs should be reported as a production cost, as well as direct materials and direct labor. Therefore, this cost should be accounted for as general manufacturing expenses and reported as part of the inventory costs until they are sold.

Others disagreed and believe that this cost should be reported as an expense of the current period, so as not to overestimate the net income.

Others argue that it must be reported as prepaid advertising and reported as a current asset.

The president points out that the company is experiencing financial difficulties and that the option that does not affect the profits of the business and facilitate the obtaining of a loan necessary for next year should be chosen. At the same time, he prefers an option that attracts less attention from financial analysts and regulators.

Questions:

1. Identify and summarize the ethical issue that exists in this situation.

2. Discuss who the affected parties are in this situation if it is done in a misleading or incorrect way.

3. Describe the treatment you recommend as correct, regardless of the president's message.

4. Clearly explain the effect on net income of your recommendation.