Section 22 - Installment Sales and Cost Recovery Method

Question 1

What are the 3 methods of recognizing revenue?

Answer 1

1) Accrual - GAAP
2) Installment Sales approach
3) Cost Recovery Method

Question 2

When is the Installment Sales approach permitted?

Answer 2

When there are substantial doubt that the receivable will be collectible – based on the conservatism principle

-Commonly used for tax purposes

Question 3

Which revenue recognizing method is the MOST conservative?

Answer 3

Cost Recovery Method

Question 4

How are revenues recognized under the Installment Sales Method?

Answer 4

Revenues are deferred and recognized each year proportionate to the cash collected during that year - Conservatism

Question 5

How do you calculate the revenue under the Installment Sales Method?

Answer 5

Gross Profit Recognized
Cash collected x Gross Profit % = Profit recognized (I/S)

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

Gross profit = Sales - COGS
Gross profit % = Gross profit/ Sales price

Question 6

What is the J/E for the Installment Sales Method?

Answer 6

Unrealized Gross Profit

Deferred Gross Profit

Question 7

Under the Cost Recovery Method, when is income/profit recognized?

Answer 7

Not until the amount is recovered - MOST CONSERVATIVE

All profit is recorded as “deferred gross profit”

JE
Unrealized Gross Profit
Deferred Gross Profit

Question 8

Under IFRS, if revenues are not likely to be collected, what revenue recognition method is used?

Answer 8

Cost Recovery Method