Question

Swift Corp., a capital goods manufacturing business that started on January 4, 2019, and operates on a calendar-year basis, uses the cost recovery method of profit recognition in accounting for all its sales. The following data were taken from the 2019 and 2020 records.

    2019 2020

Installment sales                                 $800,000         $1,000,000

Cost of sales $600,000 $700,000

Cash collections on sales of 2019 $500,000         $300,000

Cash collections on sales of 2020 –0– $600,000

Instructions: Using cost recovery method

(a) Compute the amount of realized gross profit to be recognized in each year

(b) State where the balance of Unrealized Gross Profit in each year

Answer 1

Under the cost recovery method, a business does not recognize any profit related to a sale transaction until such time as the cost element of the sale has been paid in cash by the customer. Once the cash payments have recovered the seller's costs, all remaining cash receipts (if any) are recorded in income as received. This approach is to be used when there is considerable uncertainty regarding the collection of a receivable.

(i)& (ii)

Years	2019	2020
profit to be realised on sale of 2019	$500,000	$300,000
Unrealised profit of 2019	$300,000	$0
profit to be realised on sale of 2020	$0	$600,000
Unrealised profit of 2020	$0	$400,000