LeapFrog 2006 Annual Report Download - page 80

LEAPFROG ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share and percent data)
The Company also provides estimated allowances for product returns, chargebacks, promotions and
defectives on product sales in the same period that it records the related revenue. The Company estimates
allowances by utilizing historical information for existing products. For new products, the Company estimates
allowances for product returns based on specific terms for product returns and its experience with similar
products.
The Company discloses its allowances for doubtful accounts on the face of the balance sheet. Other
receivable allowances include allowances for product returns, chargebacks, defective products and promotional
markdowns. Other allowances totaled $41,522 at December 31, 2006 and $44,415 at December 31, 2005.
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 books are initially released for sale and continues over a three-year life
using the sum of the year’s digits method. In the years ended December 31, 2006, 2005, 2004, the Company
capitalized $8,473, $3,915 and $1,965, respectively, and amortized $3,537, $2,643 and $3,261, 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 2006, the Company accelerated amortization of $212 of
capitalized content related to titles not planned to be sold.
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. During the year ended December 31,
2006, the Company had no capitalized video production costs. In the years December 31, 2005 and 2004, the
Company capitalized $213 and $1,364 respectively. For the years ended December 31, 2006, 2005 and 2004, the
Company amortized $249, $1,038 and $684 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. During the
year ended December 31, 2005, the Company accelerated amortization of capitalized video production costs
totaling $377.
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. Prepaid advertising was
$198 and $294 at December 31, 2006 and 2005, respectively.
Translation of Foreign Currencies
Assets, liabilities and results 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 liabilities
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