Inventory Question

[Kram BergGold]

My client is self publishing a book. In 2008 she paid $12,000 for graphic design work for the book. In 2009 there will be additional graphic desgin expenses. Income from sales did not start till 2009. I am now doing her 2008 return. I think these expenses should be put into inventory. There will be no other expenses to inventory as books are only printed when they are sold or given away as promotion by the author. The only system I can think of to use here is a units of production method. I assume I would use as the denominator a figure which includes the expected give aways as well as the expected sales. Any other ideas?

[Nashville]

Intangible Asset

You don't have inventory, you have an amortizable intangible asset. If she orders the printing of books, then the cost of printing those books become inventory. The intangible asset should be depreciated over such time as necessary to recover the cost. I don't have any idea how long that would be, or whether it may be amortized on units-of-production. If units-of-production is OK, you're still back to the same question -- how many units are necessary to recover the cost?

Mark, your client is also telling you something that doesn't stack up, either from ignorance or some other reason. Printing costs are NOT something that you can incur one or two books at a time, or even 10-12 books at a time, and then go back a couple weeks later and have a few more printed. For any printing operation, setup costs are HUGE, and the only way to economically offset these setup costs are to have the printing done in very large quantities.
If she doesn't already know this, she will find out shortly.

[Kram BergGold]

Nashville

Excellant advise. Also, the printing and shipping of the book is done by a company. I assume they have everything set up on computer so they can print small batches without ridiculous costs. My client gets a check when a book is sold. She is totally out of the produvtion loop.

[JohnH]

If she is using one of the "vanity publishers or subsidy publishers", then they may be printing the book on a short-run basis and a relatively high unit cost. I have a client who is doing that, but I told him he should probably just consider it a hobby. So far (2 years) I've been proven correct. One major difference between him and your client however - his upfront expenses were on the order of $2K or so, not the $12K your client has spent. So she has a much stronger incentive to handle this as a business venture.

[Kram BergGold]

Business for sure

The book is in her field of work. It is not a hobby.