Threads main

(NEXT(58c3b89b740448869657317f71af54ea))/Main/AllMode/FramesetHybrid/FramesetFromPSHView.ed?ihm=1321476… 21/30
seller’s cost of the inventory sold. After all costs have been recovered, all additional cash
collections are included in the income.
Reference:
Kieso, Donald, Weygandt. Jerry, & Warfield, Terry. 2013, Intermediate Accounting, 15
th
ed.,
John Wiley & Son, 2013
RE: Installment Sale vs. Cost
Recovery Method
Maria McCormick
9/1/2016 10:29:34 AM
The 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 is
deferred until actual cash is received. Once accounts receivable has been collected, a portion of the
deferred gross is recognized by calculating the percentage of gross profit times cash collected. The
cost recovery method recognizes revenue once cash payments have recovered the seller's costs and
the remaining cash receipts received is recorded as income. This approach is used because there is a
considerable level of uncertainty regarding the collection of the receivable. For example, if a
company 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 $7
million the total revenue recognized and total gross profit earned under cost recovery method would
equal all other methods but its distribution among various periods would be different.
RE: Installment Sale vs. Cost
Recovery Method
Michael Amoako
9/1/2016 12:14:11 PM