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(NEXT(58c3b89b740448869657317f71af54ea))/Main/AllMode/FramesetHybrid/FramesetFromPSHView.ed?ihm=1321476…21/30seller’s cost of the inventory sold. After all costs have been recovered, all additional cashcollections are included in the income.Reference:Kieso, Donald, Weygandt. Jerry, & Warfield, Terry. 2013, Intermediate Accounting, 15thed.,John Wiley & Son, 2013RE: Installment Sale vs. CostRecovery MethodMaria McCormick9/1/2016 10:29:34 AMThe installment sales method is used when periodic payments are made to the seller in real estate,or consumer appliance transactions for example. The gross margin on the sale transaction isdeferred until actual cash is received. Once accounts receivable has been collected, a portion of thedeferred gross is recognized by calculating the percentage of gross profit times cash collected. Thecost recovery method recognizes revenue once cash payments have recovered the seller's costs andthe remaining cash receipts received is recorded as income. This approach is used because there is aconsiderable level of uncertainty regarding the collection of the receivable. For example, if acompany sold equipment that was worth $20 million and received 1st quarter receipts of $3 million,2nd quarter receipts of $4 million, 3rd quarter receipts of $6 million and 4th quarter receipts of $7million the total revenue recognized and total gross profit earned under cost recovery method wouldequal all other methods but its distribution among various periods would be different.RE: Installment Sale vs. CostRecovery MethodMichael Amoako9/1/2016 12:14:11 PM