Accounting- Losses from Roadshow Charged to Profit and Loss. A corporation producing and distributing motion pictures, before presenting its quarterly financial statement to the New York Stock Exchange, on which its securities were listed, was faced with the question of how to distribute the losses of exhibiting one of its pictures by a special form of exploitation known as roadshowing. Although roadshowing was utilized as a form of advertising not only for the particular picture but for the producing company in general, in this case it had been largely a failure. The company decided to charge this item to profit and loss for the quarter.
(1928)
In the preparation of a statement of earnings for the first quarter of the fiscal year 1928, the comptroller of the Ellison Pictures Corporation considered the disposition to be made of losses incurred in roadshowing a feature motion picture production. The quarterly statement was the last one to be issued prior to a change in the management of the company.
"Roadshowing" was the term designating the pre-release exhibition of a motion picture in the larger cities of the United States. Only feature pictures of special merit were so exhibited. Such pictures, preceded by an advance agent and accompanied by a company manager and a special orchestra, were sent from city to city to be exhibited. These exhibitions usually took place in legitimate theaters leased for that purpose. A top admission price of $2 was commonly charged for roadshows.
The Ellison Pictures Corporation, with studios in Hollywood and distributing offices in New York, was one of the largest motion picture producer-distributor companies. It sold pictures through its distributing organization, which included exchanges in 31 key cities of the United States. It distributed on a percentage basis pictures made by other producing companies.
Ellison pictures in the 1927-1928 season had not been so well received as the executives of the company had expected. In the opinion of the executives, this was because the product received from the other producing companies was of poorer quality than it had been heretofore. As a result of the low quality product, considerable sales resistance had been met and the total product distributed by the Ellison Pictures Corporation had not been shown in so many theaters as had been expected.
In order that the new selling season, starting late in May, 1928, might open as auspiciously as possible, the company had decided to select one of its forthcoming releases to be roadshown for the purpose of rehabilitating an interest in the company and in its product. It was hoped that the success of a particular picture would constitute a strong selling point in obtaining exhibition contracts for new pictures. The company had recently produced for release early in February, 1928, a picture entitled Indiana.2 The picture was of a type not ordinarily roadshown but was of sufficient merit, in the opinion of a sales executive, to warrant extra exploitation.
Expenses and receipts for the roadshowing of the picture were assembled
in an account termed "Roadshow- Indiana." Expenses incurred were
debits to the account and receipts were credits. The debit balances, or
losses, were as follows:
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Debit Balance
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| Dec. 31, 1927 |
$29,766.04
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| Jan. 28, 1928 |
47,849.18
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| Feb. 25, 1928 |
60,798.62
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| March 24, 1928 |
67,905.27
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A question arose concerning the disposition of this loss in the preparation of the quarterly statement of earnings for the New York Stock Exchange, upon which the securities of the company were listed.
Advertising, publicity, and exploitation expenses were commonly charged directly to a particular picture as far as possible, and the balance was arbitrarily allocated to pictures. The cost of producing the negative, together with the above expenses, and print costs were amortized during the life of the picture. An amortization schedule had been prepared upon the basis of past experience as to incoming revenue from pictures; weekly percentages from the table indicated the amount of picture value to be amortized during each period of four weeks. Total cost was ordinarily amortized during the first 72 weeks of the life of the picture. In determining the profit realized from pictures distributed, the amount of gross income received was credited, and picture amortization and current distribution expense were debited to Profit and Loss.
From the results of the roadshowing as compared with similar results from other roadshown pictures, the comptroller was convinced that the picture Indiana would never receive sufficient income to offset its production cost. The allocation of the additional expense incurred through roadshowing the picture would only increase its deficit. At the same time he realized that by roadshowing the picture the company would receive more income than it otherwise would have, since roadshowing served to exploit a picture and to render it more valuable as a drawing attraction in exhibition. Some part of the roadshow expenditure might logically be allocated to general advertising, inasmuch as the roadshowing of the picture was for the purpose of building up the company's name. It was logical, furthermore, to presume that additional sales on other products during the last two months of the 1927-1928 season had been made as a result of the roadshowing of the picture Indiana.
On the other hand, the income tax division had frowned upon capitalization of advertising expense as an asset and would be inclined to question the accounting. Again, the roadshowing had been largely fruitless in accomplishing the purpose desired; the picture's pre-release exhibition did not provide a strong selling point. If, however, the amount of the loss incurred in roadshowing were charged as a loss during the quarter in which the expenditure was incurred, the quarterly statements became of little value for comparative purposes.
Commentary: The value of roadshowing a picture prior to general release is not an issue in this case. It should be noted, however, that if a company decides to roadshow a picture, the picture should be of such a quality as to warrant this unusual procedure. In this particular problem the picture Indiana should never have been roadshown. The picture did not in itself yield sufficient income to offset its production cost; still less did it earn a profit. Its pre-release exhibition did not provide any strong selling arguments which might be used later by salesmen. The usual purposes to be attained by roadshowing, therefore, were not attained in this instance.
The mistake having been made, however, the immediate issue became one of what should be done with the losses which were incurred. It would seem that a sound decision would have been to withdraw the picture as a roadshow and sell it as a feature picture if possible. In this manner some additional revenue would have been received, and, since it would have been sold together with other pictures, no additional cost would have been incurred by so selling it. The picture should have been charged with the additional expense incurred as the result of roadshowing, even though this would have increased its deficit. The total losses on the picture should have been charged off in precisely the same manner as the losses on any other picture. It would have been quite illogical to charge any of the roadshowing expenditure to general advertising, since evidence in the case indicates that the roadshowing of the picture neither tended to build up the company's name, nor assisted in the sale of other pictures. The conclusion suggested, therefore, is sound, quite aside from the attitude of the income tax division.
There would have been a stronger argument for charging the losses to advertising had those losses been incurred as a result of an attempt to exploit the picture on Broadway only, instead of roadshowing it. Broadway exploitation, while it is expected to yield revenue, is designed chiefly to aid in the selling of the picture to exhibitors. Since the purpose is primarily advertising, there may be some justification for so exploiting a picture, even though the additional costs are not fully met by the box office receipts at the exploitation theater.3 Such a loss would not ordinarily be justified were the picture roadshown for the sake of the profits to be directly obtained from such exhibition.
In the case under consideration, the company did not actually follow the procedure recommended above but charged the entire amount of the loss incurred in roadshowing during the quarter to the profit and loss account. This decision may have been the result of the fact that the quarterly statement to which reference is made was the last one to be issued prior to a change in the management of the company, rather than of a failure to weigh properly every element in the case.
November, 1929 H.T.L.
3 See Goldstein
Howard Thompson Lewis (commentaries), "Ellison Pictures Corporation, Accounting, Losses from Roadshow Charged to Profit and Loss," Harvard Business Reports, Volume 8, Cases on the Motion Picture Industry, (New York: McGraw-Hill, 1930), pages 80-83.
© 1999, David Pierce, on editing and revisions (if any)
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