Question

. installment sales for 2018 is $600,000 and cost of goods sold $300,000 while the installment sales in 2019 is $1,000,000 and cost of goods sold $800,000, cash collection from 2018 sales was $400,000 in 2018 and $200,000 in 2019, cash collection from 2019 sales was $500,000 in 2019 and $500,000 in 2020, using cost recovery method compute gross profit realized in 2018?

a.
$100,000.

b.
$200,000.

c.
$300,000.

d.
$150,000.

Answer 1

Answer is option A - $ 100,000.

Facts of the question :

In 2018,

Sales on credit is $ 600,000,

Cost of goods sold is $ 300,000 and

Collection from customers during the year is

$ 400,000 and balance $ 200,000 in the subsequent year 2019

Under cost recovery method the gross profit will be recognised only when the collections from credit sales i.e., customers, exceeds the cost of goods sold. This model is generally applied when there is uncertainity in revenue recognition.

In other words, realisation of gross profit will be deferred until the proceeds realised are exceeding the cost of goods sold and the amount of gross profit to be recognised will be the proceeds collected in excess of cost of goods sold during the reporting period.

In the given case for the year 2018, collection from the customers $ 400,000 is exceeding the cost of goods sold $ 300,000 and thereby gross profit will be realised in the year 2018,t the extent of amount collected over and above the cost of goods sold.

= Cash collection from customers (-) Cost of goods sold

= 400,000 (-) 300,000

= 100,000.

$ 100,000 will be realized as gross profit for the year 2018 and

The balance $ 200,000 will be realized as gross profit in the year 2019 as the remaining proceeds are collected during the said year.

Thereby final answer is option A