at described below. Facts: ABC Grocery Store is a client of your CPA firm. ABC r

Question

at described below. Facts: ABC Grocery Store is a client of your CPA firm. ABC received an ATD in the amount of $600,000 from the Kellogg Company (which is substantial in amount for ABC) and requires purchases of product in the amount of $6,000,000 from Kellogg over the next six years. Purchases of product from Kellogg are expected to be made in the amount of $1,000,000 per year. If the purchase agreement is not fulfilled by ABC Grocery, then ABC must repay a pro rata portion of the ATD to Kellogg. Your client asks, "Must I report income ($600, 000) in the year of receipt of the ATD?" or "Can I allocate the income ("earned" by purchasing the product) to the upcoming six years based on the amount of purchases made in each of t client?

Explanation / Answer

ABC has received an ATD of $600,000 from the Kellogg Company and has to make purchases of product worth $6m, spread through the 6 years, $1m per year.

So, following the “Accrual Concept of Accounting” and the “Matching concept of Accounting”, ABC should allocate the Income earned by purchasing the product to the next upcoming six years based on the amount of purchases made in each of the years.

According to the Accrual concept, the income has to be booked in the year in which the corresponding expenses have been booked. The Matching concept says that revenues should be matched with the expenses to generate that revenue.

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