Recyclers Ltd was formed for the purpose of collecting and recycling household garbage in Australia’s capital cities. The company has been in operation for 5 years and has managed to be profitable enough to survive. Nevertheless, it has come across a number of problems, especially related to the need for new technology to increase the amount of recyclable waste. Another problem has been in separating recyclable and non-recyclable material, which householders have been placing in their recycle bins.

The company has been seeking financial support from the local and international community in order to carry out its research program to improve the technology of the industry. Hearing of the company’s need, the well-known environmentally conscious philanthropist, Richard Rich, decided to donate $1 000 000 to the company for the purpose of continuing its research activities. All that he asked was that the money was spent wisely, and that the company provided him with financial statements after each 6 months, showing how the money was spent and how the research was progressing.

The company accepted the money gratefully and was happy to comply with Rich’s wishes; the managing director believed that Rich may be prepared to donate more money in future if technological progress could be shown to occur.

When Rich’s cheque for $1 000 000 arrived, there was considerable disagreement among the accounting staff as to how this transaction should be recorded. One accountant believed that the money should be treated as revenue; another argued that it should be regarded as a type of capital account, and called ‘donated capital’.

Required

Advise the managing director of Recyclers Ltd of the best accounting treatment. Present reasons for your answer.