America Online Inc Case Study Essay

3. Was AOLs policy to capitalize subscriber acquisition costs justified prior to 1995? Ans AOLs method of accounting policy was labeled aggressive and capitalized its subscriber acquisition costs when its archrival CompuServe didnt.AOLs biggest expenditure was the cost of attracting new subscribers and maximizing shareholders value 1. Separate registration meter and passwords were issued to customers. They cost more than $40 per new subscriber in 1994. 2. AOL aggressively marketed its online service both directly and indirectly. 3. To retain new subscribers and increase customer truth & satisfaction, AOThe noteable accounting procedures followed by AOL were as follows a. AOLs amortization period for subscriber acquisition costs was about 15 months, such aggressive accounting was attributed to the bundle up & direct mail trade practices b. During September 1995, the company modified the components of subscriber acquisition costs as incurred Analysisa. It is not advisable for AOL to capitalize the merchandise costs because in 1990s Web was being established. This would definitely impact the sales. Instead of amortizing the Acquisition Costs for 15 months, if we treat it as single lumpsum cost, the Income averment shows a loss for the period. Capitalizing the expenditure for 2 years contained an implicit assumption for the coming two years. This was unlikely with the online industry as it had acquired most of its customers in the snuff it 36 months,If AOL were to write off all capitalized subscriber acquisition costs the effect on the 1995 balance would be a $77,229,000 reduction in early(a) assets and stockholders equity. If all the subscriber acquisition costs incurred in fiscal year 1995 were expensed in 1995, the effect on the income statement would be an increase in marketing expense of $50,837,000 and an increase in net loss of $50,837,000