Cost Recovery Flashcards
True or False
Cost Recovery method is not the most conservative method in revenue recognition.
It’s the installment sale method that is the most Conservative.
False: The cost recovery method is ACTUALLY the most conservative method of revenue recognition.
This because: no profit is recognized until all costs have been recovered. It’s the most conservative method because it does not rush into recognizing revenue right away until all receivables have been collected (via cash collections) over time. Recognize profit in the later specific year when collect the last cash payment to recover your cost of sales on inventory.
How are Cost Recovery and Installment sale method similar?
How are they differ?
They’re both similar in that it may only be used when receivables are collected over an extended period and there is no reasonable basis for estimating their collectible.
Other words: Recognize (Gross profit or realized profit) during the time period when cash is collected from a receivable (Debit Cash / Credit receivable).
The only difference is that: Installment sale recognizes Gross Profit (realized earned profit) each time a cash is collected on the receivable.
Cost recovery is where recognize during the period when the company has recovered all of their costs. Even if the cash collected in that later specific period is a portion amount or the entire amount.
Ex. Year 1: $400,000 cost recovery receivable;
Also have $300,000 cost of sales;
And have $100,000 Deferred Gross profit
(400,000 sale - $300,000 cost = $100,000 deferred gross profit)
During year 1, only collect $150,000 cash. No recognize earned profit. This $150,000 goes towards recovering the $300,000 cost of sales.
year 2: $250,000 remainder is collected.
Therefore, cost recovery receivable for $400,000 is reduced. The $300,000 cost of sales is finally recovered Therefore, $100,000 is now Earned profit.
What are the Journal entries for cost recovery with these data:
Sale recovery = $50,000
Cost of sales = $30,000
Deferred gross profit = $20,000
During Year (first period) of sale?
During the periods of cash collections (Year 1 to year last)?
Final period (final year) of collecting last payment and recognize earned profit?
During of year 1 of sale (example):
Dr: Cost Recovery Receivable 50,000
Cr. Inventory (at cost) 30,000
Cr. Deferred Gross Profit 20,000
During period of collections:
Year 1 (at later date in year 1):
Dr. Cash 5,000
Cr. Cost Recovery Receivable 5,000
Year 2:
Dr. Cash 14,000
Cr. Cost Recovery Receivable 14,000
Year 3:
Dr. Cash 31,000
Cr. Cost Recovery Receivable 31,000
In year 3, entire $30,000 is recovered and thus recognize earned $20,000 gross profit.
Also in year 3:
Dr. Deferred Gross Profit 20,000
Cr. Realized gross profit 20,000
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