Chapter 5, Problem 5.17BYP

Requirement – 1

To determine

Methods of Revenue Recognition

There are three methods or principles to recognize the revenue and costs for a business entity, they are:

1. 1. The Realization principle or Point of delivery method
2. 2. The Installment sales method
3. 3. The cost recovery method

Installment sales method:

Under the installment sales, the revenue and costs are recognized only when the payment of cash is received from customer. Two composed components are involved in the each payment of cash, and components of sales are as follows:

• Partial recovery of the cost from sales
• Component of gross profit

These components are determined by the percentage of gross profit.

Cost recovery method:

Under the cost recovery method, gross profit is recognized when the cost of the sales is recovered. Where there is an extremely high degree of uncertainty in the installment sales, then this method can be used.

To calculate: The amount of gross profit that would be recognized in 2016 using each method.

Requirement – 2

To determine

To discuss: The circumstances under which each of the three methods would be used.