[Scared-cpa]

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?

[Anonymous]

This kind of thing is really frustrating, but you have to make sure you're reading the question extremely carefully. It's easy to see the words “installment sale” and translate that in your brain into “installment method,” but you have to remember that not all installment sales are accounted for with the installment method. One thing that helps me is to break down the question into little chunks and make sure I understand each chunk before looking at the question as a whole. So in this case, I would read “according to the cost recovery method” and remind myself what that is before moving on to the rest of the sentence.

[Scared-cpa]

@allison213 Thanks for your response. I get what you're saying – I guess the only way for me to fix it is to do more “tricky” practice questions!

[vodrldnr]

Cost method and installment method is two method of recognize revenue for installment payment.

Do not confused the method of recognizing revenue with the actual payment.

[Skynet]

Cost Recovery : Is when your wife or girlfriend runs up your Credit Card bill and you have to return all the things she purchased.

Installment Method: After returning whatever you can to get you Credit Card Bill down that your or girlfriend ran up and had to file for bankruptcy, you request an installment plan to pay it off.

[Scared-cpa]

@vodrldnr I must have forgotten this when studying – I don't even remember the installment method hardly at all and have relearned most of it through MCQ review. Kind of scary! Thanks for your simple explanation!

@Skynet Lol, I enjoyed that explanation more than I probably should have. It helped me understand it a little better, though. I've noticed that I freak myself out when answering questions because they are “CPA” questions, so I mentally think they are harder. I've began imagining they're just questions for one of my grad courses or apply it to my everyday life and it helps me grasp it better, so your explanation is right up my alley!

[Author]

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