Quick Fix Ltd is a manufacturing company engaged in the production of adhesives. The company has not performed well over the past three financial years.

In order to improve on the poor past profits, the board approved a R1 000 000 advertising promotion during the year ended 31 December 2018 in order to generate increased sales in the future. The advertising promotion took place (and was paid for) during December 2018.

The accountant insists on recognizing the R1 000 000 payment as an asset at 31 December 2018. His reasoning is that future sales will increase as the number of customers grows due to the advertising campaign.

Required:

1.1 Discuss whether you agree with the accountant, making reference to the framework. Provide an alternate treatment if you disagree. 

1.2 One of the most important characteristics that a set of financial statements should have is reliability. Explain, in terms of the framework, how to ensure that a set of financial statements is reliable. 

Answer rating: 100% (QA)

11 ANSWER Any company that incurs promotion costs must account for them as income in accordance with the standards of generally accepted accounting wh... View the full answer