2. Our company has recently entered into a long-term and a radical agreement with several of

our retailers in Australia. Under the new agreement, at the start of every quarter, we will ship

a variety of our products (suitable for that state and that time of the year) to our retailers. All

retailers have agreed to set aside a section in their stores to exclusively display our products

including the display windows at the front of the store. In return we have agreed to pay a fee

to each store on a monthly basis for allowing us the access to this window space and space on

the shop floor to advertise and sell our products. The average fee is around $600 per square

metre, per store per month. At the end of the quarter, the store will return all the unsold

products to us and we will send out a new shipment to prepare for the next quarter. The stores

will also transfer the revenue from total sales to us after deducting the display fee noted above.

The board unanimously agreed to recognise the sales revenue at the start of the quarter

(when the goods are shipped). At the end of the quarter when the excess inventory is returned

to us by the stores, we can always make the necessary adjustments i.e. reverse both the sales

revenue and cost of sales as well the amount owed by the stores and the incoming inventory.

After all, the net effect would be the actual sales of the period. The board also agreed that the

fee we pay to the stores should not be recorded separately because that is the cost of doing

business. So we will only record the net amount received as sales revenue. This should

simplify matters, shouldn't it?