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PRICE, WATERHOUSE & COMPANY 501
payable $1,305 on or before execution of the contract and the balance, $1,957.50, upon completion of the equipment installation. In addition, the exhibitor agreed to make weekly payments throughout the term of the license. These were to be $146.70 per week for the first two years, and thereafter, for the balance of the 10-year term, they were to be in accordance with the licensor's then current schedule of weekly payments for similar licenses, but were not to exceed one-fourth the weekly payment agreed upon for the first two years. While the wording of the contract gave little information as to the nature of the charge represented by the individual payments, after the remainder of the license fee had been paid, it was known that the payments covered interest and insurance, and service and inspection charges. This example was based on the form of contract of one of the large licensors of electrical sound reproducing equipment; the contracts of other licensors varied considerably in their terms.
When the first theaters were equipped with sound devices, differences of opinion existed among exhibitors as to the accounting procedure to be followed. Sound pictures were an innovation in the amusement field; the number of such pictures available for exhibition was limited; there was little definite knowledge as to the durability and utility of the equipment ; and there was no certainty as to the permanency of this form of entertainment.
Some of the plans proposed by exhibitors, using the above example for convenience of illustration, were:
(a) To capitalize the first two payments ($3,262.50) as cost of installation to be written off over a period of two years, and to consider as operating expenses all weekly payments as made.
(b) To capitalize the entire amount payable within the two years ($18,519.30), to be amortized evenly over the period of the license (10 years), and to charge to operating expenses currently all subsequent weekly payments.
(c) To capitalize the first two payments ($3,262.50) plus threequarters of the total weekly payments during the first two years ($11,442.60) and to write off the aggregate ($14,705.10) over 10 years by weekly charges of $28.28. It was argued that as the weekly payments after the first two years were to be reduced to an amount not exceeding one-fourth of the weekly payment provided for the earlier period, three-fourths represented the part applicable to the license fee.
Price, Waterhouse & Company considered Method (a) to be incorrect in that neither the total cost of the license fee nor the