Question

Cowboys Inc. made sales on account with the total selling price of $4 million and the total cost of $1,800,000 during 2014 Cash collections on these sales were as follows

Cowboys, Inc. made sales on account with a total selling price of $4,000,000 and a total cost of $1,800,000 during 2014. Cash collections on these sales were as follows: Year Cash Collections 2014 $1,500,000 2015 2,000,000 2016 500,000 Provide the amount of gross profit recognized each year using three alternative revenue recognition methods. Traditional Approach Year Installment Sales Method Cost Recovery Method 2014 2015 2016 Under the traditional approach revenue is recognized in the year it is earned, in this case, the year that the sale is made. I I S

Answer 1

1. Under traditional method the entire revenue is recognised in the year of sale, that is 2014. Therefore gross profit under traditional method will be as follows,
   1. 2014 = 2,200,000. (4,000,000 - 1,800,000).
   2. 2015 = Nil
   3. 2016 = Nil
2. Under installment sales method, revenue is recognised in the ratio of cash collections, therefore the revenue of 4,000,000 is recognised over 2014, 2015 and 2016 in the ratio of 15:20:5. Therefore the gross profit will be as follows,
   1. 2014 = 825,000 ((4,000,000 - 1,800,000) ÷ 40 x 15)
   2. 2015 = 1,100,000 ((4,000,000 - 1,800,000) ÷ 40 x 20)
   3. 2016 = 275,000 ((4,000,000 - 1,800,000) ÷ 40 x 5)
3. Under cost recovery method, no revenue will be recognised until the entire cost of 1,800,000 is recovered. Gross profit will be as follows,
   1. 2014 = Nil,
   2. 2015 = 1,700,000 (4,000,000 - (1,800,000 - 1,500,000)) (that is 1,500,000 is recovered in 2014)
   3. 2016 = 500,000 (as the cost is already recovered entire collection will be the gross profit).

Fill the table with these figures and you are done.