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?

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 statement that is not correct in this case is option d: Subsequent income statements report the gross profit as a separate item of revenue when it is recognized as earned.

Step-by-step explanation:

The statement that is not correct in this case is option d: Subsequent income statements report the gross profit as a separate item of revenue when it is recognized as earned.

When using the cost-recovery method, the deferred gross profit is not reported as a separate item of revenue in subsequent income statements. Instead, any additional cash collections after all costs have been recovered are included in income.

For example, if the seller originally sold a product for $100 and the cost of the product was $80, the seller would initially recognize a gross profit of $20. If the seller uses the cost-recovery method and recovers $80 in costs, any additional cash collections beyond that $80 would be recognized as income, without reporting the gross profit as a separate item.