Question

A manufacturer of large equipment sells on an installment basis to customers with

questionable credit ratings. Which of the following methods of revenue recognition is least likely to overstate the amount of gross profit reported?
a. At the time of completion of the equipment (completion of production method)
b. At the date of delivery (sales method)
c. The installment-sales method
d. The cost-recovery method

Answer 1

The cost-recovery method is least likely to overstate gross profit for sales to customers with questionable credit, as it recognizes profit only after the recovery of costs.

Step-by-step explanation:

The student asked which revenue recognition method is least likely to overstate the amount of gross profit reported when a manufacturer of large equipment sells on an installment basis to customers with questionable credit ratings. Among the listed methods, the cost-recovery method is least likely to overstate gross profit. This is because, under the cost-recovery method, profit is not recognized until the cash payments received from the customer exceed the cost of the goods sold. Therefore, this method defers the recognition of profits until it is more certain that the revenue is collectible, which is a conservative approach when dealing with customers who have questionable credit ratings.