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According to the cost recovery method of accounting, gross profit on an installment sale is recognized in income:
A. After cash collections equal to the cost of sales have been received.
B. In proportion to the cash collections.
C. On the date the final cash collection is received.
D. On the date of sale.Originally I said ‘B’ because I saw installment sales and you recognize GP by the income multiplied by GP percentage. But the answer is ‘A’ so it was asking about the cost recovery method. If the question hadn’t had the words “installment sale” in it, I would have understood it was asking about cost recovery, but I thought it was asking about installment.
The response is: Installment methods of recognizing revenue are appropriate only when “collection of the sale price is not reasonably assured.” Under the cost recovery method, gross profit is deferred and recognized only when the cumulative receipts exceed the cost of the asset sold.
During test day, when it mentions different types of recognition like this, how can I make sure I don’t make this same mistake?
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