LeapFrog 2004 Annual Report Download - page 87

LEAPFROG ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share and percent data)
Allowances for Accounts Receivable
The Company has established an allowance for uncollectible accounts based primarily on management’s
evaluation of the customer’s financial condition, past collection history and aging of the accounts receivable
balances.
The Company also provides for allowances related to returns, discounts, promotions and defective products.
The Company records these allowances on product sales in the same period that the related revenues are
recorded. The Company bases these estimates on historical sales returns, defective returns, promotions, analysis
of credit memoranda and other known factors, as required.
Our disclosure of receivable allowances includes only allowances for doubtful accounts. Other receivable
allowances: include allowances for product returns, charge backs, defective products and promotional markdowns.
These other allowances totaled $45.8 million at December 31, 2004 and $25.4 million at December 31, 2003.
Shipping and Handling Costs
Costs to ship merchandise from the Company’s warehouse facilities to customers are recorded in cost of
goods sold.
Content and Video Capitalization and Amortization
The Company capitalizes certain external costs related to the content development of its books.
Amortization of these costs begins when the respective book is initially released for sale and is then amortized
over a three-year life using the sum of the years digits method. In the years ended December 31, 2004, 2003,
2002, the Company capitalized $1,965, $1,662 and $3,616, respectively, and amortized $3,261, $3,604 and
$1,991, respectively, of external content development costs. Capitalized content development is included in
property and equipment, and the related amortization is included in cost of sales. In 2004 the Company wrote off
a total of $928 of capital and $862 of accumulated amortization related to titles not planned to be sold in 2005.
There were no write-offs in prior years.
The Company capitalizes costs related to the production of home video in accordance with AICPA
Statement of Accounting Position No. 00-2, “Accounting by Producers or Distributors of Film.” Video
production costs are amortized based on the ratio of the current period’s gross revenues to estimated remaining
total gross revenues from all sources on an individual production basis. In the year ended December 31, 2004 and
2003, the Company capitalized $1,364 and $1,015 and amortized $684 and $620 of video production costs,
respectively. Capitalized video production cost is included in property and equipment, and the related
amortization is included in cost of sales.
Advertising Expense
Production costs of commercials and programming are expensed when the production is first aired. The
costs of advertising, in-store displays and promotion programs are expensed as incurred. Advertising costs
associated with cooperative advertising are accrued as the related revenue is recognized. Pre-paid advertising was
$733 at December 31, 2004 and $227 at December 31, 2003.
Translation of Foreign Currencies
Assets, liabilities and operations of the Company’s operations outside of the United States are recorded
based on their functional currency. When included in these consolidated financial statements, the assets and
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