EJ publishes trade magazines and sells them to retailers. EJ has just concluded negotiations with a large supermarket chain for the supply of a large quantity of several of its trade magazines on a regular basis.
EJ has agreed a substantial discount on the following terms:
• The same quantity of each trade magazine will be supplied each month.
• Quantities can only be changed at the end of each six-month period.
• Payment must be made six monthly in advance.
The supermarket paid $150 000 on 1 September 2007 for six months supply of trade magazines to 29 February 2008. At 31 October 2007, EJ had supplied two months of trade magazines. EJ estimates that the cost of supplying the supermarket each month is $20 000.
Required:
(i) State the criteria in IAS 18, Revenue, for income recognition.
(ii) Explain, with reasons, how EJ should treat the above in its financial statements for the year ended 31 October 2007.