FAR 22 - Installment Sales & Cost Recovery Method

Question 1

What are three methods of recognizing revenue?

Answer 1

1. Accrual Method
2. Installment Sales Approach
3. Cost recovery Method

Question 2

Accrual Method

Answer 2

• use when collection is reasonably assured
• degree of collectability is estimable
• profit is recognized when earned & realizable

*Normal GAAP

Question 3

Installment Sales Approach

Answer 3

• Collection is not reasonably assured

- Profit is recognized as cash is collected

• More conservative

Question 4

Cost Recovery Method

Answer 4

• Collection not reasonable assured
• No basis for determining whether or not collectible

- No profit recognized until entire cost is recovered

- Most conservative

JE:

DR: Unrealized GP

CR: Deferred GP

Question 5

What are the two improtant formulas that is to be used to calculate revenues based on the Installment Sales Approach?

Answer 5

1. Gross profit recognized

Cash Collected x Gross Profit % = Profit Recognized (I/s)

2. Deferred Gross Profit

Receivable Balance x Gross Profit % = Deferred Profit (B/S)

NOTE: Deferred GP is a CONTRA to A/R

Installment sales approach - profit is collected as cash is collected.

Question 6

What is the formula for Gross Profit %

Answer 6

Gross Profit % = Gross Profit / Sales Price

Question 7

Journal Entry for Installment Sales Approach

Answer 7

Profit must be deferred since profit is based on cash collected

DR: Unrealized Gross Profit (I/S - Reduction)

CR: Ueferred Gross PRofit (B/S - Adj to Receivable)