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Question - In July, 2017, Longview Ltd purchased 1,000 air conditioners from it supplier. The normal selling price from its supplier is $1,000 each. Due to the large quantity of its order, Longview Ltd is able to get 10% discount, equivalent to $100,000 off. Longview sold 500 units in the fiscal year of 2018 and the remaining units in the fiscal year of 2019. Longview Ltd booked the $100,000 discount from its supplier as revenue directly in the fiscal year of 2018. A closer look of the annual report of Longview Ltd shows that the CEO has cash bonus tied to its accounting profits. Longview Ltd has June 30 as its fiscal year end.
Required -
(1) Longview Ltd booked the $100,000 discount from its supplier as revenue in the fiscal year of 2018. Is this practice appropriate and why?
(2) Why did the CEO of Longview Ltd choose this accounting treatment? Discuss using the related accounting theory.
(3) Based on the mechanistic hypothesis, what would happen to the share price of Longview Ltd at the announcement of accounting performance for the fiscal year of 2018?
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