The Hilt Company, a public relations company, signs two-year contracts with its clients. For $80,000 in advance, the company agrees to ensure that the client’s name is mentioned five times on a network national news program, 10 times in a national news magazine, and 15 times on a local news program. In 2007 the company signed eight contracts; no additional contracts were signed in 2008.

In 2007 the company’s clients were mentioned 10 times on network national news programs, 40 times in national news magazines, and 22 times on local news programs. In 2008 the company’s clients were mentioned 30 times on national news programs, 40 times in national news magazines, and 98 times on local news programs. The relevant cost information for the eight contracts is as follows:

Initial direct costs ......................$ 20,000

Annual indirect costs .......................80,000

Estimated (and actual) total direct costs for two-year period .......260,000

Direct cost per

National news program ........................2,000

National news magazine ......................1,500

Local news program .........................500

Required

1. Prepare the income statements for 2007 and 2008.

2. From a theoretical viewpoint, how should the company compute the depreciation of its office building and office equipment that would be included in the preceding costs? Why?