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Westpac with $1 million worth of free products upon execution of
the agreement. McCormick further agreed to make the following
“incentive payments” as Westpac achieved various volume purchase
targets:
Volume Level Cash Payment Free Product
$10,000,000 $3,000,000 $750,000
20,000,000 2,000,000 750,000
30,000,000 2,000,000 750,000
40,000,000 1,000,000 750,000
The contract obligated Westpac “to repay any unearned prepaid
allowances on a pro rata basis” in the event Westpac failed to
satisfy the entire $50 million volume purchase commitment.
Westpac's Financial and Tax Reporting
Westpac recorded the upfront cash payments which it received
from GTE Sylvania, Ambassador, American Greetings, and McCormick
as liabilities in favor of the manufacturers. For financial and
tax accounting purposes, Westpac would treat a portion of the
payment which it considered earned (that is, the amount of the
total payment received multiplied by the percentage of the volume
purchase commitment satisfied during the year in issue) as either
an item of “other income” or as a reduction to its cost of goods
sold. Specifically, on its 1990 tax return, Westpac reported
what it considered to be the earned portions of the upfront cash
payments received on the Ambassador and GTE Sylvania contracts as
other income because Westpac had no cost of goods sold during
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Last modified: May 25, 2011