Question

A seller is properly using the cost-recovery method for a sale. Interest will be earned on the future payments. Which of the following statements is not correct?

1) After all costs have been recovered, any additional cash collections are included in income.
2) Interest revenue may be recognized before all costs have been recovered.
3) The deferred gross profit is offset against the related receivable on the balance sheet.
4) Subsequent income statements report the gross profit as a separate item of revenue when it is recognized as earned.

Answer 1

The incorrect statement is that 'interest revenue may be recognized before all costs have been recovered.' Under the cost-recovery method, interest can be recognized independently, while profit on the sale of goods is not recorded until all costs are recovered.

The correcgt opiton is 2.

Step-by-step explanation:

In the context of the cost-recovery method of accounting, the statement that is not correct is that interest revenue may be recognized before all costs have been recovered. Under this method, no profit is recognized until the costs of the goods sold are fully recovered.

The correct approach would involve recognizing interest independently if it is indeed earned, even before the full cost recovery. This interest is accounted for separately from the recovery of the cost of goods sold.

After all costs have been recovered, any additional cash collections are recognized as income, such as in statement 1). Statement 3) is also correct, since the deferred gross profit is indeed offset against the related receivable on the balance sheet. Lastly, statement 4) is accurate as well, as subsequent income statements report the gross profit as a separate item of revenue when it is earned.

The correcgt opiton is 2.