BudgetVacations 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. The company is thinking of going public to raise funds for expansion. However, currently, negotiations are under way to obtain a bank loan in order to update its facilities. It is producing close to its capacity and expects to grow at an average of 20% per year over the next three years.

After reviewing the financial statements of BudgetVacations, Grace Hall, the bank loan officer, said that a loan could only be offered to BudgetVacations if it could in- crease its current ratio and decrease its debt-to-equity ratio to a specified level. Thomas Zang, the marketing manager of BudgetVacations, has devised a plan to meet these requirements. Zang indicates that an advertising campaign can be used to immediately increase circulation. The potential customers would be contacted after BudgetVacations purchases another magazine's mailing list. The campaign would include:

1. An offer to subscribe to BudgetVacations at three- quarters of the normal price.

2. A special offer to all new customers 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, Zang claims that few people will ask for a refund after receiving half of their subscription issues. Zang 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. Zang 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, Zang 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 BudgetVacations for a couple of weeks.

Instructions

Assume the role of the controller and discuss the financial reporting issues that BudgetVacations faces.