Question

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

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

Answer 1

The correct statement is option c. Under the cost-recovery method, the deferred gross profit is not offset against the related receivable on the balance sheet.

Step-by-step explanation:

The correct statement is option c. Under the cost-recovery method, the deferred gross profit is not offset against the related receivable on the balance sheet. Instead, the deferred gross profit is reported as a liability on the balance sheet until all costs are recovered. Once all costs are recovered, any additional cash collections are included in income.

For example, let's say a seller sells a product for $1,000 with a cost of $500. The seller recognizes $500 as gross profit and records it as a liability on the balance sheet. As the seller receives cash payments, they first recover their $500 cost and once that is fully recovered, any additional cash collections are included in income.