F2 Installment Sales and Cost Recovery Method

Question 1

Installment Sales - Problem Solving formulas

Answer 1

Gross Profit = Sale - Cost of goods sold
Gross Profit Percentage = Gross Profit / Sales Price
Earned Gross Profit = Cash Collections x Gross Profit Percentage
Deferred Gross Profit = Installment Receivable x Gross Profit Percentage

Question 2

Cost Recovery Method

Answer 2

cost recovery method can only be used when receivables are collected over an extended period and there is no reasonable basis for estimating their collectibilty
- you do not record any gross profit until the entire cost of the item is collected

Question 3

Revenue Recognition

Answer 3

Installment Sale: recognizes revenue as cash collected rather than acclerating revenue recognition
Cost Recovery: recognizes revenue when all costs have been collected

Question 4

Installment Sales- method

Answer 4

• installment sales are material and there is no reasonable basis for estimating collectibilty