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502 HARVARD BUSINESS REPORTS
full amount of the liability to the licensor would be set up. The operating results would be on a conservative basis, but the first two years would be unduly penalized.
According to the auditors, to treat the entire amount payable within the first two years as the cost of the license, as mentioned in Method (b), would mean: (i) that the carrying charges under the deferred payment plan and the service and inspection charges relating to the period would be improperly capitalized; and (2) that while the license granted was for a period of 10 years, the amortization of the cost of the license over that term could not be considered a conservative course to follow so long as uncertainty existed as to the permanency of the new form of entertainment. The auditors objected to Method (c) because the cost of a license was ascertained and conclusions were arrived at by supposition, and the auditors also criticized the period of amortization.
Price, Waterhouse & Company made a study of the situation, and ascertained that the total sum payable under the license agreement could be segregated in relation to :
(1) License fee, including installation of licensed equipment (Covered by initial payment and a portion of the weekly payments over the first two years)
(2) Carrying charges for interest and insurance under deferred payment plan
(Included in payments made in the first two years)
(3) Service and inspection charges
(Included in payments over first two years and the entire amount of the payments during the remaining eight years of the license period)
The payment made upon the execution of the agreement represented 10% of the total license fee including installation charges. There were also charges such as freight and cartage, forming part of the installation cost, which are not considered in this discussion. The auditors recommended to their theater clients that the full amount of the license fee and installation cost (ten times the amount of the payment made on the execution of the agreement) be set up on the books as an asset with a liability of corresponding amount to the licensor. In view of the comparatively recent development, the lack of certainty that this form of entertainment would continue to receive the support of the public, and the possibility that improvements might render the present equipment obsolete before the expiration of the license period, five