Ad-Smart (Pty) Ltd (Ad-Smart) was established on 1 April 2020 with a financial year-end of 31 March.
Question:
Ad-Smart (Pty) Ltd (‘Ad-Smart’) was established on 1 April 2020 with a financial year-end of 31 March. The company specialises in the placement of billboards and maintenance of advertising billboards. Ad-Smart is not registered for Value-Added Tax (VAT). Since its inception date, Ad-Smart signed contracts with each of its advertising clients. One of its advertising contracts contain, among others, the following terms and conditions:
- At the commencement of a contract, signed on 1 June 2020, a client paid a refundable, once-off fee of N$180 000 for the right to advertise for an 18-month period; and
- Ad-Smart’s client also pays a monthly maintenance fee in advance to Ad-Smart. This is used to maintain the billboards of the clients. Ad-Smart prepares detailed estimates of the maintenance costs for each contract in order to ensure that a reasonable profit is earned. Maintenance costs are incurred evenly over the period of the contract; and
- Ad-Smart’s client is also charged for the design and set-up of their billboards, and this is invoiced separately upon completion.
Ad-Smart’s new accountant, Mr Smarty, contacted you for advice on how to treat the 18-month contract fees mentioned in number 1 (above). Ad-Smart’s first year-end is around the corner and Mr Smarty is unsure if the accounting treatment by the previous accountant was correct, as she only passed the following journal upon receipt of the fees from the client:
Debit | Credit | |
Bank (SoFP) | N$180 000 | |
Income (P/L) | N$180 000 |
REQUIRED | MARKS | ||
Sub total | Total | ||
a) | As Ad-Smart’s financial advisor, write a memo to Mr Smarty to advise him on the appropriate definition and recognition criteria in terms of the Conceptual Framework for the 18-month once-off fee mentioned in number 1 above for the year ended 31 March 2021. Communication skills - layout and structure | 14 1 | 1 |