Treatment of revenues and expenses in quarterly accounts It’s early April x5 and Demeter Company, a Mediterranean-based producer of horticultural equipment, is about to publish quarterly financial statements for the first time. The company has a December year-end and follows international accounting standards. Demeter’s chief financial officer asks your advice on how the following items should be dealt with in the first quarter’s report (to end-March x5).

Set out below is the treatment she thinks is most appropriate for each revenue (expense) item.

Proposed effect Item on Q1 net income CFO’s comments Deferred maintenance 0 The cost incurred in Q1 was A50,000 but it really charge belongs in Q4 x4. The spending was deferred in order that the company could achieve its earnings target in x4. I think we should take the whole cost in Q4 x5 as an exceptional charge at year-end.

Dividend on financial A20,000 No dividend was received in the quarter. The investment company expects to receive A80,000 over the year, the same as in x4. I reckon the income should be spread evenly over the year.

Cost of major advertising (A30,000) The campaign was launched in early March and campaign cost A90,000. The company expects to receive the benefits evenly over three months, March–May x5.

I propose we split the cost and book one-third in Q1 and two-thirds in Q2.

Proposed effect Item on Q1 net income CFO’s comments Foreign currency 0 The fall in the dollar in Q1 resulted in a A45,000 transaction gain gain on the company’s outstanding dollar debt.
I don’t think we should book any gain in Q1 because it’s not realised and the dollar may recover later in x5.
Restructuring charge (A17,500) In Q1 the company announced plans to restructure one of its businesses. The plan is an outline only:
there are no firm details. Expected total cost is around A70,000. No outlays were made in Q1. I propose we spread the expected cost evenly over the year.
Required Advise Demeter’s CFO. How should the company account for each of the above five items in its Q1 x5 income statement? Give reasons for the accounting treatment you propose.AppenedixLO1