Chapter 18 Discussion - 1. Why the installment method is...

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1. Why the installment method is not GAAP? The revenue recognition principle provides that companies should recognize revenue, (1) when it is realizable or realized and (2) when it is earned. Furthermore, the installment method recognizes income in the periods of collection rather than in the period of sale. Therefore, the profession concluded that except in special circumstances, “the installment method of recognizing revenue is not acceptable.” The rationale for this position is simply because the installment method recognizes no income until cash is collected, which is not in accordance with the accrual accounting concept. 2. When is revenue recognized under the cost recovery method? Under the cost recovery method, revenue is documented (along with the germane cost of goods sold) in the period of the sale. Nevertheless, gross profit is not recognized until all the cost of the merchandise has been recovered. That is, the first payments received from customers are treated as a recovery of the cost of goods sold. Once the
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Chapter 18 Discussion - 1. Why the installment method is...

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